A Possible Disconnect

By: Kent Engelke | Capitol Securities

Until an early afternoon sell off, oil prices were around their highest levels of the year. Conversely, oil shares are lagging oil prices and are greatly underperforming. The divergence between crude and share prices does not last for long. Either crude is going to drop or oil equity prices are going to rally.

The reasons for the divergence are numerous. Electronic based trading firms are programmed to interpret a drop in inventories as bearish as such supports a rise in production that will later suppress prices. The belief is that OPEC will not continue with production cuts. Global oil demand will not meet expectations. Or because oil is not technology.

Speaking of technology, according to Bloomberg, the S & P 500 technology index is at its 50 day moving average. As noted several times recently, there has been a major transition out of everything but technology into technology, thus suggesting a very imbalanced market. The Trump trade has been unwound.

Can the following scenario unfold? A mega capitalized technology growth company disappoints, selling commences in the technology sector and funds gravitate to oil and the financials? As noted above, the divergence between crude prices and oil securities normally does not last for long.

Yesterday IBM profits fell short of expectations, the major reason for the 100 point decline in the Dow. Oil also fell about 3.5% on mixed inventory data [note: oil initially advanced on the statistics].

Last night the foreign markets were mixed. London was down 0.04%, Paris was up 0.75% and Frankfurt was unchanged. China was up 0.04%, Japan was down 0.01% and Hang Sang was up 0.97%.

The Dow should open nominally higher partially on the news that the crude producing countries reached an initial agreement to extend output cuts. The 10-year is off 4/32 to yield 2.32%.


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