If you needed further confirmation that crude oil is no longer the dominant theme impacting equity trading, last week provided it. That is not to say that crude doesn’t remain a significant and important factor for traders, only that it is no longer single-handedly driving direction. Crude posted a constructive day on Friday(+6.02%) as well as a solid week (+11.2%) but equity prices languished, posting their weakest weekly performance in well over a month. As crude has managed to post relatively positive, though range bound, price action on the week, equities have increasingly lost their way. In fact distribution days are beginning to add up for both the Nasdaq (6) and S&P 500 (3). Volume is materializing on down days and clear signs of stress are making themselves apparent. For the week, the NASDAQ, S&P 500 and Dow Industrials all lost modest ground in the 1% range while the Nasdaq breached its 200 DMA. The Nasdaq’s weak performance was fueled in part by the poor price action posted by large cap leaders Netflix (NFLX) and Facebook (FB).
I expect to see crude’s dramatic rise on Friday run into stiff resistance this week. It closed on Friday at $39.72/bbl, up 6%, but if recent history is any indication, we should see supply in the form of sellers materialize in the $41/bbl – $42/bbl range – if it even gets there. I am also expecting to see some worrisome guidance this week from those companies reporting Q1 results, with some exceptions. Additionally, Q1 results have been ratcheted lower in recent weeks, as we have discussed, and though normally a lower bar in terms of expectations allows for more “surprises” to the upside, given the backdrop of Q4’s results – I am cautious. Weaker than expected results and guidance will only add conviction to the directional trade lower that took shape last week.
We managed to escape a rather dire Q1 in terms of equity market performance, but now that Q2 is underway it appears as though weakness has reasserted itself.
This week investors will be focused on earnings and data. Wednesday’s Retail Sales and PPI-FD coupled with Thursday’s CPI and Friday’s Industrial Production data will be key for investors focused on both expansion but also inflation. Inflation remains illusive domestically and more particularly globally.