Testy Tuesday – Dow and Nasdaq Flirt with Dangerous Inflection Points

33,075.

That’s the 10% line on the Dow off the January high of 36,750 and while we don’t care about that line much at PSW, as we follow the much more accurate 5% Rule™ – it is something the Financial Media tends to latch on to so we’re going to get our bounce here and see how strong that is.  The line we care about on the Dow is 31,680, which is the strong bounce line off the 20% correction at 28,800, which is 20% off 36,000 because we consider the whole 750-point move above it to be unworthy of being counted.   

• Dow 36,000 to 28,800 would be a 7,200-point drop with 1,440 bounces to 30,240 (weak) and 31,680 (strong).   
• S&P 4,800 is 20% above 4,000 and that makes it an 800-point drop with 160-point bounces so 4,160 (weak) and 4,320 (strong).
• Nasdaq is using 13,500 as the base and we bottomed yesterday at 13,103.  14,100 is the weak bounce and 14,700 is strong.  
• Russell 1,600, would be about an 800-point drop with 160-point bounces to 1,780 (weak) and 1,960 (strong).

4,320 on the S&P 500 turned red since yesterday and all that matters today is whether or not we can take it back.  The S&P is at 4,231 this morning – so about 100 points to go but we hit 4,138 yesterday, briefly getting even redder, so things are not looking too promising for the rest of the indexes staying out of that 20% correction territory.   The Nasdaq is even below it’s 20% line at 13,370 so who cares what 30 Dow stocks do when the major (and harder to manipulate) indexes are still weakening?

We’re getting a little pre-market pop due to a cease-fire this morning but it’s limited and not likely to last – Russia is allowing some civilians to flee so they can start dropping bigger bombs, basically.  At $122.50 per barrel, Oil threatens to upend calculations for company costs, consumer behavior and the course of inflation – NOTHING is fixed at all until oil is back below $100.  

“The market’s on increasingly shaky ground,” said Hans Olsen, chief investment officer at Fiduciary Trust. “When you combine the price shocks that we’re seeing in the energy complex on one hand and the galloping inflation that we’re dealing with on the other hand, that’s a really tough mix for an equity market to hold valuations where we are right now.”

Monday’s losses were broad-based, with 9 of the S&P 500’s 11 sectors declining.  The Energy group, of course, added to its gains for the year while the Utilities segment advanced for the day as well.  Consumer Discretionary led the decliners, dropping 4.8% on the day.  Investors appear to be in classic flight-to-safety mode and stocks are suffering as a result, said Kelvin Tay, the Singapore-based regional chief investment officer for UBS.  Very high oil prices will function as “a tax on the global economy, and therefore global growth will actually have to slow,” he said.

Travel-related companies that could be hurt by higher fuel prices and the possibility that consumers could cut back on travel because of geopolitical tensions got hit hard yesterday.  United Airlines (UAL) shares dropped $5.51, or 15%, to $31.20, and Delta Air Lines (DAL) shares fell $4.41, or 13%, to $30.11 and they are back below the November lows that caused us to send out a Top Trade Alert to our Members – so great for a new trade again!  

War is not Covid.  People are still allowed to fly.  Probably not to Russia or over Ukraine but, if the war isn’t spreading then it’s just a matter of cost and fuel is 1/3 of airline costs so if you have a $300 ticket and 1/3 of that ticket doubles – you have a $400 ticket – not a shut-down airline.  Will it impact earnings while the airlines adjust prices – probably but, again, they are still flying and revenues will come in and profits will correct – this is very silly.   And shame on the airlines, by the way, for not buying up futures contracts when oil was cheap.  They KNOW they will be consuming fuel for the next 10 years – so why not lock it down when prices were low?  

Oil was below $30 in March, April and May of 2020 and because Delta Airlines only pays $100,770 to their “Commodity Manager” , they lost out on an opportunity to save hundreds of millions of Dollars over the next decase by locking in sub-$50 oil – which I bet they really wish they had some of now.   I used to consult for F500 companies and it is truly amazing how much they neglect commodity trading as part of their business process. 

A company like Delta, that actually uses massive amounts of oil – about 3.4Bn gallons a year so call it 100M barrels.  That is a market-moving amount of oil and their ability to take delivery of 10M barrels (10,000 contracts) per month means they COULD play the oil market with very little downside consequences and, if they play it right, they should be able to save Hundreds of Millions of Dollars each year through trading.  

Joe Biden could do the same thing.  We have 650M barrels of oil in the Strategic Petroleum Reserve and, this month, he can sell 60M of them for $120 and flood the market with oil and that will either drive down the prices (which is what we want) or we can do it again next month.  Since we can do that for 10 months, I can buy 60,000 Jan 2023 contracts for $95 to replace the 60M barrels we’re selling for $120 now and I’ve locked in a gain of $25 ($1.5Bn) on the sale and replacement of our oil reserves.  See how easy it is to make money when you have actual use for a commodity and know how to plan?  

Speaking of Biden, he is about to issue an executive order on Cryptocurrency as a first step towards regulating it.  The order is expected to describe what government agencies, including the Treasury Department, need to do to develop policies and regulations on digital currencies. It is expected to include a request for the State Department to ensure that American cryptocurrency laws are aligned with those of US allies and will ask the Financial Stability Oversight Council - which monitors the stability of the US financial system - to study illicit finance concerns.  Additionally, the order will explore the possibility of a new central bank digital currency. The Federal Reserve issued a paper on the topic in January that explores the risks and benefits of US-backed digital currency.  

We may have to add more hedges if our 20% lines start failing – be careful out there. 

Provided courtesy of Phil’s Stock World.