U.S. markets struggled last week closing modestly lower after several weeks of gains. Perhaps it was the exhaustion gap higher following the President’s speech or the building reality that there’s a disconnect between investor perception and the actual timeline of administration proposals.
The President has said they are committed to a Tax Reform package by August. As I pointed out during my interview on Yahoo Finance show Market Movers on Friday; “sure it might be August but it’s probably August 2018.” Even Senate Majority leader Mitch McConnell has come out and called the August timeline unrealistic.
Is this the beginning of the end of the Trump Rally? Unknown, but it’s most definitely the end of the beginning. The Trump rally started with DOW (DIA) futures down over 900 points on Election Night and never looked back. Today, the S&P 500 (SPY) sits nearly 8% above its 200 day moving average and up close to 11% since the Election.
Some of the market breadth indicators like the NYSE Advance Decline line are struggling along with one of my favorites the NYSE Bullish Percent Index now close to a reversal. It’s not uncommon for markets to pause after such a monster run and I caution it is way too early to be calling the end of the Bull Market.
Jobs Jobs Jobs
Friday’s jobs number was another strong report with several bright spots including an increase in the Labor Participation rate. As I pointed out in last week’s article for Yahoo Finance a Fed hike this week is all but certain with the only real debate centering on whether there will be 3 or 4 for 2017.
Trouble in the Oil Patch
If you’re looking for something to worry about look no further than Oil (USO). The oil markets cracked Wednesday following a very bearish inventory report showing crude stockpiles jumped 8.2 Million barrels to an all-time high. Brent & WTI fell more than 5% following the release with a continued decline on Thursday & Friday.
The SPDR Energy ETF (XLE) is now living below the 200 day and is the worst performing sector off over (-7%) year to date. This is in sharp contrast to every other sector including the next worst, interest sensitive Utilities (IDU) up +4.8%.
For the last few years, markets seem to stall every time we get concerned about oil. In October 2014, stocks cracked as WTI was well into its slide lower from 2014 highs of $107. After recovering, stocks again struggled throughout 2015 as oil breached $50 and then $40 per barrel. The bottom finally came in early 2016 when WTI broke $28 as investors became concerned that U.S. banks had too much exposure to the energy complex on their loan books.
Last week speculators were caught on the wrong side of crude with many positioned for higher prices in the coming months. Despite an OPEC cut that helped stabilize prices it appears there is no guarantee of an extension, especially by the Saudis.
Oil bulls are up against a simple dynamic. In a world where technology has completely changed the landscape of the energy patch, OPEC as a cartel structure with the ability to dictate prices no longer exists. Even last week, Bernstein put out a note pointing to increased efficiency in the Permian Basin. The best thing that could happen for Oil Bulls is a geo-political event disrupting supply or synchronous global growth increasing demand. Let’s hope it’s the latter.
*At the time of the post some funds managed by David Nelson were long SPY
David Nelson, CFA is the Chief Strategist of Belpointe Asset Management. The members of his firm, DC Nelson Asset Management LLC, merged into Belpointe at the beginning of 2011. At Belpointe he manages the firms US Equity Strategy: Alpha Select.