Global markets slump. Huge fall on DOW 30. Markets hit by massive sell off. Just a few headlines grabbed from the usual market media channels. Panic Panic Panic? Well, not quite. Lets take a less dramatic and non sensationalist view at the DOW chart below:
Looking at the pre-santa rally trading range of 23500… all good there and still some 1800pts higher than the lower September numbers. Now, with traditional Santa rally periods, stocks rise into year end as all brokers and funds involved do their best to secure bonuses and year end numbers. A self-gratifying process. From late Nov to year end the DOW jumped to 24750. That’s now 3000pts higher than the previous quarter (Sept low). Historically, that’s a massive rise in a single quarter. Hence what follows from Jan 2nd through to 4th week in Jan is just ridiculous. A rise of another 2000pts added in just 3 weeks. So lets just discount the fluff and nonsense from the last 4 weeks and get back to 24500 level which incidentally is still some 2000pts above Aug/Sept levels. With that done, we are still in ‘happy days’ territory and the only thing lost on the DOW is some over exuberance and festive cheer trading. I noted last week that a 2500pt drop on the DOW was likely purely because there was no reason for it to rise that high in the first place. A correction has been expected for sometime but lets make it clear. The expectations for a correction started when the DOW was 21k and not 26.7k, hence, the DOW has plenty of steam or fluff to offload as yet. Dropping 1400pts in the last week is about 50% of the nonsense done. Another 1400pts would take the DOW down to around 24k level or just under. A move to 23k or 22k would just about return the index to levels last seen 6 months ago. Hardly a global slump is it!? But just imagine the headlines due should the DOW drop another 3000pts. Panic Panic Panic? Markets are casino’s. And volatility is good for the ‘house’. So prepare for more drops on the DOW. A simple correction to Q3 2017 levels is worthy of 4000pts drop alone and long overdue.
Moving onto Commodities. It’s a different picture entirely. Commods have been slow to correct higher and whilst the DOW might look frothy, the same cannot be said of Commodities. PoO has been rising strongly for the last 12 months. The compliance levels of OPEC has blown many doubters away and cost a few shorting Hedge funds a small fortune in the process. What’s more is that the usual mantra of higher prices equalling higher US production is nothing more than ‘fake news’. US shale production has yet to show signs of solid growth after the PoO downturn. Signs of growth returning are often represented by the US ‘OIL’ RIG COUNT which gives a decent indication of new drilling activity and is often a product of greater investment. So lets take a look at the ‘oil’ rig count chart below:
Well well well. Or perhaps not well well well. More like static well. The US Oil rig count stands today at exactly the same level it stood back in July 2017. Now the eye opener is the corresponding 6 month WTi chart below:
Now, if Crude rises from $42pb to test $67pb, in theory US oil rigs should be rising at a significant rate too. Afterall, $50pb+ is supposed to be the point whereby US Shale investment bounces back.
Based on the above, PoO 50% increase has delivered zero in terms of Oil rig count increases. So if anyone says US shale and investment is flooding back, just point them to these two charts which prove the opposite.
To put it into context, with PoO at $67pb, The US Rig count should actually be just shy of 1000 rigs today. So if US Oil rigs begin to rise from 765 to 800 over the next few weeks, that’s still negative compared to where they should be. Same applies to a rise to 900 rigs. But just like the recent media news channel headlines on the DOW’s frothy top slice, you can bet your bottom dollar that the headlines will read ‘SHALE bounces back’ when (or IF) the Oil Rig count numbers hit 800+. But that’s not the case at all. US shale has been ‘SLOW’ to recover in ‘OIL’ Rig count terms and if that rig count can’t rise substantially at $67pb, then it certainly isn’t going to rise too much with WTi at $57pb. Hence, any near term pull backs in PoO is actually bullish for PoO in the longer term. So don’t be surprised to see PoO in the $50’s at some point during 2018 albeit short lived I imagine. It’s certainly one to watch over the coming weeks and months as PoO continues to align with lower supply and higher demand.
Unfortunately, Markets tend to use a broad brush when dealing with equities. If the DOW tops off, then all indices wobble which is crazy and relatively unsophisticated in a world that is supposed to be ‘sophisiticated’. The Dollar’s previous weakness was certainly a benefit to miners so it’s fair to say that any corrections are valid based on the Dollar strengthening. Don’t mix that up with the DOW correcting.
Week 5 saw some ‘corrective’ action taking place. TheShareHub continues to lead the pack but has lost over 12% from a peak of 16% just a couple of weeks ago. That shows the ‘hefty’ broad brush applied across equities when in theory many of these stocks are making the same money 3 weeks ago as they are today. Nothing has changed for many commodity focused stocks on a simple earnings basis. Infact, many are earning more as debt reduces.
In summary, the DOW could shed over 3500pts and in theory it should not effect or relate to commodity stocks at all. That said, with ETF’s and trackers galore, algo bots, so on… it’s hard for sectors such as commodities to avoid the contagion that comes from a big market Index correction.