Weekly Update

The Turning Point

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Published December 23, 2016


As technical chartwatcher-type folk, we review the year from a chart perspective. When doing so, we noted a major turning point in 2016 for the markets. That turning point occurred in mid-February. Take note of this headline from CNN-Money on February 11th as a reminder: “Oil crash taking stock down … again

On that date, oil prices plunged another -5% to $26.21, their lowest point in 13 years. The Nasdaq stock index was, at that point, down almost 20% from its peak. On this particular day, the Dow Jones Industrial Average fell over 400 points. This excerpt from the article with the above “Oil crash …” headline explains the negative sentiment of that time:

“The International Energy Agency said earlier this week that it expects the global oil glut to grow throughout the year.
With the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term,” the IEA said in its monthly report.

Related: Don’t expect oil prices to rise soon, IEA warns

Freed from sanctions, Iran ramped up its production to nearly 3 million barrels a day in January — an 80,000 increase from December. Iraqi output reached a record high of 4.35 million barrels a day in January, and shipments from Saudi Arabia have also increased.
Many have been hoping that low oil prices would boost oil demand. But the IEA, which monitors energy market trends for the world’s richest nations, is predicting a slowdown because of global economic headwinds.”

More broadly, there was even some talk of a coming recession in the U.S. Stocks had suffered their worst first week of the year ever and were struggling to find any footing.

Only 3 days later, oil prices surged +12% as rumors of an agreement to slow production began to circulate. It took most of the year for that agreement to actually come to fruition. But the shift in tone made all the difference. And stock investors almost never looked back as the chart below displays. Interest rates, in the middle box of the chart, would continue falling with the Brexit vote being the catalyst for sending rates to their lows.

Chart 1: February marks the bottom for oil (and stocks too it turned out

February marks the bottom for oil (and stocks too it turned out

High-yield bond spreads tumble

The dramatic change in attitude toward oil prices was reflected in the spread of high-yield bonds for energy companies over risk-free rates. The higher the spread in yields the more concerned with risk investors are, as they are demanding more compensation for taking on that risk. Once the above-mentioned expectations for an oil output agreement come into view, expectations for defaults in the energy sector plummeted. And they never stopped shrinking. That led high-yield bonds to bounce back strongly from a losing year in 2015 to a +14% gain in 2016.

Chart 2: BAML High Yield Energy Index

BAML High Yield Energy Index

Market Update

Stocks spent their second week consolidating post-election gains in a quiet pre-holiday week of trading. Monday saw gains in semiconductors push the Nasdaq Composite higher by +0.4% with another +0.5% added on Tuesday. Markets gave back -0.2% Wednesday with FedEx (FDX) offering disappointing results. Stock indexes dipped a further -0.2% Thursday on weakness in retailers while chipmakers continued to show well. Friday’s session was decidedly lightweight though managed a positive +0.1% close.

Warm wishes and until next week.