3/7-3/11/16 Charts of the Week

Crude oil has rebounded substantially over the last week. Readers will recall that crude bottomed near $28/barrel, and as of  Friday the April contract for crude futures was at over $38/barrel. This 35% rally has given many investors confidence that the worst may be over for the energy sector. MarketWatch.com and Morgan Stanley say, “Not so fast.”

1-yr-oil

Granted oil has had a great month, prices are nowhere near their historical average. Crude futures trading looked suspiciously similar back in August/September of 2015, rebounding 25%, just to fall 48% to the secular low of $28/barrel.

Our concern is that manufacturing and shipping data continues to show weakness. When we factor those data sets in with the increasing supply of crude inventories globally, we cannot confidently predict a new energy bull market yet.

Speaking of bull markets, this week the equity bull market of 2009-present turned 7 years old, and headlines could not have been more bitter…

bull-market-7th-bday

The once loved rally has quickly soured as investors began to show fear in the face of falling energy prices, weakening manufacturing data and the possibility of negative interest rates across the globe.

Market tops and the ensuing declines are never consistent; they often take very different forms depending on the macroeconomic environment in which they are born into. For example, the Dow Jones Industrial Average peaked near 18,300, then the index dropped to 15,600 and has since rallied to over 17,000…

1-week-dow

That is a rather solid week for the Dow, and an even better month…

1-month-dow

The Dow remains negative for the year (-1.45%), but analysts are unable to come to a consensus on the market’s future direction. Some claim that this is the start of the next bull market after a brief correction, while others are calling it a “dead-cat bounce,” or a brief upside rally amidst a bear market. Counter-trend rallies, as they are called, are by no means abnormal, and can make predicting a market top or bottom incredibly difficult.

Here is a brief list of some counter-trend rallies since the year 2000…

counter-trend-rallies

We fall into the camp that would refer to this as a counter-trend rally. We have not been able to uncover any sort of economic data that would support economic growth, and therefore a sustained market rally. This may be a great opportunity for investors to move some of their money to a cash position and wait for the next opportunity.

Next week the Federal Reserve’s Federal Open Market Committee will have their March meeting to discuss when, or if, they should hike rates next. Back in January, the Fed noted that any rate hikes should be data dependent rather than scheduled, which is essentially a way for the Fed to step back from any commitment regarding interest rate policy.

Traders are able to trade Fed Fund’s rate target futures, and the CME Group  (Chicago Mercantile Exchange and Chicago Board of Trade) has put together a tool that allows investors to view the likelihood of a rate hike at any of the meetings over the next several months based off of those futures. The CME Group has spoken, and the likelihood of a rate hike next week is…0%

cme-march

The CME Group is confident that there will be no rate hike at the next meeting, and are not much more confident that the April meeting will yield a hike, with that probability at a mere 20%…

cme-april

While the markets have rallied, and some economic indicators have started to show strength, the economy is still in a very fragile condition, and we feel that any rate hike in the next 6 months would only be justified by exceptional economic readings. We lack the confidence of the current US economy to yield those results.

Another topic we have been closely watching is the yield of government debt worldwide. There is currently over $9 trillion in global debt that is trading at a negative yield, which of course means a price premium…

gov-bond-yields

It is exactly this type of environment that prevents seniors from finding income in retirement, a demographic that has traditionally invested in fixed income. Now, seniors have been forced to accept more risk by investing in the stock market, where returns are often volatile and not guaranteed. We contend that this fact is one of the many reasons why the latest bull market rally has lasted for over 7 years.

If you enjoyed this piece, be sure to check out our past “Charts of the Week” posts, the daily podcast, or feel free to give us a call and schedule a free consultation on your personal finances and savings.

Happy trading!

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA (www.Finra.org) through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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