The markets have been performing well over the past week, but I remain cautious for the reasons previously stated:
Recovery has been largely in defensive areas- the DOW is above its 50dma, while the S&P500 is trading at its 50dma and the NASDAQ remains below its 50dma. Money has migrated to “safe harbors” like alcohol and tobacco stocks.
Beaten down sectors like energy are also showing better relative strength; however, I would caution that this could be a Sucker’s Rally. Oil has a great deal of resistance above $50/barrel; both from a fundamental and a technical aspect.
US shale oil rigs that are currently shutdown will quickly start pumping as they become marginally profitable. [Note: OPEC has overly estimated the production cost of US shale oil, the profit gradient is a broad $20-$65/barrel. ] I estimate the current “sweet spot” for oil is $40-$45. If global demand remains feeble, OPEC with keep prices low to discourage new exploration…possibly driving the price temporarily below $30.
From a technical perspective, Oil has a great deal of overhead resistance above $50, roughly its 100dma (see chart).
For these reasons, I believe Oil is in a false recovery and will drop below its 50dma. If Oil falls (think slow global growth), it will take Industrials, Commodities, and Emerging Markets with it.
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