the wobbly crude oil price

Over the past week or so, the world crude oil price has dropped by about 10%–although it is rebounding a bit as I’m writing on Wednesday morning.

I have several thoughts:

–this is the weakest part of the year for crude oil demand, since the winter heating season is over and the spring driving season is yet to begin

–the surprising aspect of recent crude oil prices is not that they are weak, but rather how strong they have been in January and February in the face of a rising rig count in the US and a milder than average winter in heavily populated areas around the world

–hard as this may be to believe, the price drop suggests to me that many traders in the crude oil market are new to the game, and for some reason haven’t filled themselves in beforehand on the basic characteristics of the commodity

–since there’s a direct relationship between the price of oil and the price of oil exploration and development stocks, the current odd price action in the crude market makes evaluating and trading in the equities more difficult

–I’ve built a small position in e&p stocks over the past couple of months, so I’m sitting on my hands.  If I owned nothing, I’d be tempted to buy something–although I’d be more comfortable if crude had been gradually declining in price over the past month, rather than exhibiting the panicky behavior of the past week.  This is also predicated on the idea that what’s driving crude is thoughts #2 & #3.

where’s the tax selling?

Pretty much all mutual funds and ETFs in the US have tax years that end on October 31st.  They are required by law to distribute virtually all the dividend/interest income and realized capital gains collected during the fiscal year to shareholders by calendar yearend (so that the IRS can collect income tax from holders).

Invariably, funds adjust the size of these distributions during September – October.  Whether this means making them larger or smaller, it involves selling.  This means a seasonal market correction between September 1st and October 15th.  The only exception I’ve seen in over thirty years has been in times directly following a major market selloff like that in 2000 or in 2008-09, when funds are working off massive realized losses–and have no taxable income to distribute.

Last year, for example, the selloff in the S&P was about 7.5% and went from mid-August through late September.  2014’s was 6%+ and lasted from September 19th through October 17th.

This year September has delivered about a 1% loss so far, which would be an extremely small seasonal dip.


Where’s the selling?  I don’t know.  Maybe the lack of downward market pressure comes from the fact that the S&P is flat during the current fiscal year.  In any event, if selling doesn’t emerge in the next, say, week, it’s unlikely to develop.

If it doesn’t, we’ll have missed an annual buying opportunity and will have to press ahead with annual portfolio adjustment plans without this advantage.



today’s S&P 500 trading will be interesting

The S&P 500 closed on Wednesday at 2119, after touching 2120 for a moment mid-day.  That’s within an eyelash of the 2124 and 2128 daily closing highs of last July and the intraday high for the index of 2132 made at the same time. (Note:  I’ve always thought intraday figures are more important than closing, even if they’re a tiny bit more effort to look up. That’s not the consensus view, though.  Arguably, that makes them even more important.)

This is the best attempt the S&P has made since then to test the old highs–which have so far proved firmly resistant to being bettered.

Yesterday, the market rallied from intra-day lows to close down, but not badly down, from Wednesday levels.

In the pre-market today, the S&P is showing the most significant weakness it has in a while, although we’re still talking about just over a half-percent.  We also know that dabblers in the pre-market are often derivatives traders who exert little influence on how trading in the stocks themselves plays out.  So pre-market action may have little predictive value.

In any event, I think that today’s trading might give us some insight into what the general mood of the market may be in coming weeks.


–a breakout above the current historical index highs would be a very bullish sign.  But that might be like expecting a pony for your birthday, just too much to ask.

–a reflex decline, where short-term traders, having determined that the market can’t go higher, try to push prices down to see how far they can decline

“backing and filling,” which is what technicians often call a sideways market, where stocks bob around in the space between–in this case–the May levels of 2050 or so and the new ground of 2100+ while they gather strength for a further advance.

If I had to pick one of the three right now, I’d select the third.  One twist, though.  It seems to me that as the market struggles higher, it is also reorienting itself further toward secular growth themes, specifically Millennials vs. Boomers and internet vs. physical presence.  I expect that process to continue, no matter what the overall market direction.

a change in market leadership?

Very often, when the stock market makes a significant low and begins to rebound, a change in market leadership also takes place.  A new group of individual stocks and sectors emerges as the strongest performers as the market rises, sometimes emerging from areas least expected by conventional wisdom.  At the same time, at least some of the prior market stars are left by the wayside.  In my experience, the left-behind phenomenon occurs much more frequently.

It isn’t 100% clear that the recent market decline has been significant enough to be one of these transformative moments, although the drop of around 15% in the S&P from its intraday high last November to (what we hope was) the intraday low on Wednesday is the largest fall we’ve seen in some years. Still, it doesn’t cost anything to observe and analyze stock price movements to try to uncover new trends.  And if there were one time we should be extra-sensitive to deviations from the prior norm, this would be it.

(Monthly performance records of the S&P 500 by sector going back for years can be found on my Keeping Score page.)

Has the market really bottomed?  The intraday plunge in New York trading on Wednesday, followed by sharp rises around the world on Thursday and more so far today is the typical bottoming/rebound pattern.  So my guess is Yes.  Typically, the market will repeat the pattern we saw in the S&P last August-September–that is, a rally for several weeks, followed by a return to the vicinity of the prior lows and then a stronger rebound.

Will Energy and Materials lead on the way up?  I find that hard to believe, but both sectors have been drubbed over the past year or more.

Will Healthcare and Consumer discretionary lag?  That wouldn’t be my first instinct, either.  But the important thing isn’t what I think, it’s what the performance numbers begin to say in the coming weeks.

Other possibilities?

My guess is that we’ll find more separation of companies on the Millennials vs. Baby Boomers theme.   We may also see a sharper distinction between companies born out of WWII and whose managements have resisted structural change vs. those firms, both old and new, who have embraced the internet, mobile and the cloud.  Small may begin to outperform large.



timing the stock market

In its simplest form, timing the stock market means trying to figure out when stocks are either very expensive or very cheap and acting on your conclusion by selling stocks at the high points, holding cash for a while and backing up the truck to buy them again when prices are at their lows.

Two problems with market timing:

–it’s risky.  Historically the bulk of the positive returns from owning stocks occur on about 10% of the days.  Missing them can be devastating.

–it’s difficult to do.  In fact, in almost thirty years in the business I’ve never met a successful market timer.  I’ve encounter lots of unsuccessful ones, though.

There are professionals who are good at calling market tops.  Some are good at calling bottoms.  But I don’t know anyone who can do both.  More typical is the portfolio manager who “helps” his clients by raising a ton of cash on his view that the market is toppy, is psychologically unable to admit his mistake as stocks continue to rise and whose successor gets the task of cleaning up the resulting performance mess.


I have no idea where the strong negative emotion driving stocks lower globally is coming from.  So I think it’s best to stay on the sidelines until the craziness burns itself out.

Still, I noticed a couple of things about yesterday’s trading that suggest a bottom may be approaching.

–the S&P 500 broke through support at 1865 or so at the open and in short order found itself at the next support level of around 1815 at lunchtime.  The market made an immediate reversal and closed right around (just below) the former support.

The next support below 1815 is at 1870 or so.  We’ll see in the next few days whether the S&P can either recover above 1865 or hold above 1815.

–some stocks that I don’t hold but which are on my screen went crazy yesterday.

SCTY fell by -12% in the morning but closed up by almost +9% for the day.  That’s a 20% intraday swing.

LC fell by -9% in the morning but closed up by +8% for the day.  That’s a +17% intraday swing.

Yes, these are speculative stocks.  And they’ve been pummeled during the market downdraft.  But wild intraday swings like this are most often found at market turning points.

What to do?

I’m starting to comb through my portfolio for stocks that have held up well during the downturn to date and thinking about switching them for more interesting stocks that have been slammed over the past couple of months.  I’m not doing anything yet.  And I’m in no way contemplating making basic changes in portfolio structure.  But there may be an opportunity developing to upgrade at reasonable prices.