One Direction Higher?

By |2018-01-29T13:56:33+00:00February 1st, 2017|Uncategorized|
Stock market performance in the 6 weeks following President Trump’s victory is the best among all elections since 1900. Equity traders and investors appear to have locked into a trade that has but one direction – higher. On Friday, the NASDAQ closed at 5660.78 while the S&P 500 (2294.60) and Dow Industrials (20,093.78) closed at or fractionally off all-time record highs. Even the volatility index (VIX) has quietly fallen to a multi-year low of 10.58. It would appear as though traders are pricing in higher equity prices coupled with little chance of the unexpected emerging. That degree of complacency, across asset classes, has me uncomfortable particularly given that markets have marched in an uninterrupted fashion higher for nearly three months.
In no way do I expect the post-election rally to falter but I am increasingly expecting US markets to temper their charge higher as a result of a modest reset lower. FOMC will not move on rates this week after December’s lift.
Stable Trend in Crude Prices Emerging:
In a matter of three weeks, the North American rig count has jumped by a staggering 83 or 8.5%. The rise in rig counts in North America, and in the U.S. in particular, is a direct result of the stability in crude prices that I mentioned would materialize in my forecast for 2017.
This past Friday, the Baker-Hughes Rig Count data for the week ending 2/27 was released. In the release there are tell tale signs of an interesting trend emerging. Not only did the total number of North American rigs rise to 1057, the bulk of that increase came from U.S. production.
Production cuts agreed to by both OPEC and non-OPEC producers provided a soft floor for crude pricing in January, as was the intention. That stability in production and pricing in conjunction with steady consumption, dropping inventories as evidenced by recent weekly EIA Petroleum Status Reports and improving efficiencies being brought to bare by US producers have all acted in concert to provide crude markets with a counter balance, in effect a soft ceiling as a result of an anticipated increase in output.
WTI crude has been relatively free of the volatility that has been a defining characteristic of energy prices in recent years. The equilibrium found in this monthly chart will likely remain with us over the near term or unless a Geo-political event upsets the apple cart.

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