It is Getting Really Ugly.

It is getting really ugly.  Oil has been decimated down over 23% since its June apex.  In many regards it looks like oil futures are in a complete collapse as Brent crude is at the lowest level since December 2010.

There are fears of a supply glut given output is rising in the US and Russia while economic growth outside of the US is slowing.  [Note:  US oil output is at the highest level since March 1986 according to the Energy Information Administration].

Natural gas futures however are rising with Northeast prices at levels not experienced in over a decade, a price increase the result of supply and weather fears.

What a disconnect!  Unfortunately all energy company stocks have been crushed and depending upon the energy index utilized, indices are down between 25% and 30%.

Speaking of a disconnect, the NASDAQ was crushed Friday falling over 2.3% led by large cap technologies.  The extreme weakness in this high flying sector negatively affected the S & P 500 as that benchmark declined by 1.1%.  The top performer was the Dow that experienced a 0.70% decline.  The Russell 2000 was only off by 1.1% or about half of the percentage drop of the NASDAQ brethren bringing its YTD negative total return to almost 9.3% and is now down over 13.1% since its early July peak.

This can be a significant week for a number of different reasons.  First and perhaps foremost, all major market indices are trading around their 200 day moving averages.  In comments past I have opined market trading has been co-opted by the machines.

I can envision a scenario where prices can move considerably higher or lower based upon market behavior around these moving average lines.  If these averages are significantly violated, prices will move lower.  Conversely if these moving averages hold when tested, the markets can rally significantly.

The catalyst for either direction could be earnings and economic data, both of which are heavy for the next five days. If the data suggests the continuation of the proverbial goldilocks’ environment which does not challenge current monetary policy assumptions and indicate a moderate expansion and if earnings and revenues exceed expectations, prices could move substantially higher.

Conversely if the data challenges monetary policy assumptions and is too strong andif earnings/revenues disappoint, stocks could move lower.

I would argue the odds favor the former, which is the data and earning releases supporting a market advance.

I will also argue the smaller cap issues is the sector that should outperform.

Many times I have commented about the stealth bear market where the typical NASDAQ stock is down about 25%.  CNBC further quantified this data Friday reporting only 17% of the Russell 2000 is above its 50 day moving average, a statistic that suggests the selloff has been intense and is historically associated with market bottoms.

Wow!

What will happen today?  Equity trading today is expected to be muted given the Columbus Day holiday where banks and the bond market are closed.

Last night the foreign markets were up.  London was up 0.32%, Paris up 0.54% and Frankfurt up 0.76%.  Japan was down 1.15% and Hang Sang up 0.24%.

The Dow should open moderately higher following the biggest rout in over two years as many are reassessing the environment, a reassessment that the environment is not as bad as the markets had suggested last week.  The bond market is closed for the Columbus Holiday.

kentThe information is the personal views of Kent Engelke and is not necessarily indicative of those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed here are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results.

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