Energy and Macro Market Issues

Uprisings in the Middle East and Northern Africa have many market participants refocusing attention on crude oil and the energy space.

I found the above map instructive (taken from this article) as it offers a 'big picture' view of energy supply/demand worlwide.

The US position is net importer of oil (we use ~25 million barrels/day, but have production capacity of only 7 million bpd--nice data set here). The world currently consumes 80-85 million bpd of oil.

On the other hand, the US is self-sufficient w.r.t. coal (important source of electricity generation domestically).

When trying to make sense of the 'macro' picture, smart market participants factor in energy issues and the related geopolitics.

position in oil

Egypt and the S&P

Strife in the Middle East, particularly in Egypt, sent stock markets lower and crude oil higher at the end of last week.

While smaller cap indexes have already technically broken intermediate term uptrend lines, large cap stock indexes like the S&P 500 (SPX) remain in uptrends.

It is often said that trend lines on price charts should be drawn with a crayon rather than with a sharp pencil (to avoid getting too excited when prices look to be pushing thru the trend lines). As such, it appears that we would have to see price weakness thru SPX 1260 before concluding that a significant trend change may be underway.

position in oil, SPX

Baltic Dry Index

The Baltic Dry Index (BDI) is a price index of international oceanic shipping rates. When the BDI goes up, it implies generally higher prices to ship stuff via cargo vessels around the world.

Many market participants regard the BDI as an indicator of global trade. Higher BDIs imply stonger trade patterns.

During the 2008 credit market collapse, the BDI experienced a jaw-dropping decline--falling from over 11,000 to under 1000 in just a few months.

Over the past few months, the BDI has been weakening once again. Thus it represents a divergence in the thesis that economies are generally strengthening worldwide.

Another metric that may be worth watching...

Defining and Measuring Inflation

This article touches on why inflation, as measured by the Consumer Price Index, is chronically under-reported.

Did you know that the dominant definition of inflation has not always been linked to 'change in prices?' A century ago, inflation was commonly defined in terms of the quantity of money and credit.

You can ponder which definition makes more sense...

Support

Like many risky assets, silver has had a nice run since last summer. The commodity nearly doubled in price from August to early January. A tradeable proxy for silver is the ishares Silver Trust ETF (SLV).

Recently, SLV broke its uptrend line and began following thru to the downside.

Technicians may be eyeing the 24-25 level as 'support.' Support reflects a price level that may impede further price declines--at least temporarily. The conceptual argument in this case is that when silver gapped higher last November, it left lots of potential buyers behind. Many of those would-be buyers told themselves that if SLV ever returned to the 24-25 level, then they would not miss the opportunity to get long again.

Essentially, then, support levels identify price levels where potential demand may reside.

Should SLV drop another buck or so from there, then watch to see whether that potential demand doesn't materialize--at least for an opportunistic trade...

no positions

Divergences

Small cap stocks have been leading domestic markets higher. The Russell 2000 (RUT) is up well over 100% since the early 2009 lows.

Over the past week, the RUT has shown some weakness. In fact, the multi-month uptrend line in place since last summer was violated last week.

On the other hand, larger cap stock indexes such as the S&P 500 (SPX) continue to show strength. Uptrends are still technically in place.

This is an example of a 'divergence.' Divergences occur when market indicators that are 'supposed' to move together fail to do so. Often, divergences portend a change in market character. Perhaps investors are rotating out of small caps because they see relative value in large cap stocks. Maybe weak small caps reflect declining risk tolerance among investors.

Of course, perhaps this divergence is just a random phenomenon that merits no meaningful interpretation...

In any event, I've found it useful to look for divergences and keep them in mind when making sense of the tape.

position in SPX

Government Jobs

Nice article from John Mauldin (a sharp cookie) outlining some of the 'macro' or 'structural' issues that could impact financial markets in the next year or two. One focus of this particular piece is the increasingly visible role of government in the job picture. I found the data on govt vs private sector jobs are interesting. Check out the USA Today table showing avg salary difference govt vs private sector.

As John notes, the old assumption was that govt jobs paid less but were more secure. Private sector jobs paid more but were more volatile. The old risk:reward axiom.

That risk:reward axiom seems out of whack currently. The question market participants need to ask is whether that divergence is likely to continue.

Stated differently, how will this government intervention influence prices over time?