Markets React As Crude Prices Struggle To Stay Positive

The three major benchmarks turned to the downside in the early going today while crude oil prices struggled to stay positive, though they were still rattling around in bear-market territory.

Oil prices again appear to be dragging down energy shares on the Dow Jones Industrial Average ($DJI), as well as the S&P 500 Index (SPX) for the third straight session. Yesterday oil fell deeper into bear-market territory, which is defined as a 20% pullback from recent highs, to settle at $42.53, a low closing point it hasn’t touched in 10 months. (See chart.)

Some analysts expressed renewed concerns of oversupply even after the U.S. Energy Information Administration (EIA) reported a 2.5 million drawback in inventories yesterday, a usually bullish influence. Good news for energy investors, yes, but apparently the total commercial crude inventory of 509.1 million barrels is still dancing around the upper half of what’s considered average range on a seasonal basis, according to EIA. Some analysts pointed to rising production in the U.S.—up 8% over the same period last year—as a potential concern hobbling sentiment.

The impact of oil prices on the markets might be most evident in whether they weigh down energy sector earnings ahead. The energy sector is the worst-performing of the SPX, clocking a 2.3% drop against a near 9% year-to-date gain on the index overall. It might be of interest, too, that the $44 a barrel price of crude was once a support level and appears now to be a resistance level. Let’s see if the market can overcome that.

Gaining ground in the markets is the health care sector, which ranks in the top five performing SPX sectors, and easily outpaced other SPX sectors yesterday. Analysts speculated that Wednesday’s bump in biotech shares might have been inspired by news reports suggesting that the Trump administration’s efforts to curb drug prices might not be as tough as once thought.

Investors might best remember that despite these mixed results on the markets, the $DJI and SPX are still floating around all-time highs and are still on track to end the month to the upside. The SPX, which shed only one point Wednesday, is down less than 1% since peaking Monday; DJX is barely half a percentage point lower.

The Nasdaq Composite (COMP) managed to buck the downward trend Wednesday as it looks to also still end the month in positive territory. Since tapping a fresh lifetime peak on June 8, COMP has given back some 1.4%, but edged again into the plus column for the month yesterday and is still there.

Oracle Corporation ORCL results, out last night after the bell, might give investors a sense of what’s going on in the rest of the world. ORCL executives yesterday were upbeat on the conference call about both earnings and revenues, and their forecasts  across the world.  

Shares of American Airlines Group Inc AAL were moving after Qatar Airways surprised many investors when it said in a regulatory filing that it intends to buy a 10% stake in the U.S. legacy airline.

FIGURE 1: CRUDE OIL'S 10-MONTH PULLBACK It was another bruising day for crude oil, which settled at a 10-month low. Future contracts, tracked through Wednesday on the thinkorswim® platform from TD Ameritrade, dipped deeper into bear territory, continuing the better-than-20% pullback from a 52-week high. Data source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.

On the Technical Side of the Markets

How long will this rally last? This week’s pullback might be concerning to investors, but, again, do not forget that the market benchmarks are all hovering at record highs . Investors might want to keep track of support levels that historically have offered some sense of direction.

“The larger bias in stocks will remain bullish while key support zones for the S&P 500 (SPX), Nasdaq-100 (NDX) and Russell 2000 (RUT) remain intact,” according to Sam Stovall, chief investment strategist at CFRA Research. “If any of these key supports should fail, this would be a signal that the rally that began last November is ending and a new market phase is potentially beginning.”

Here’s Stovall’s take on what’s being tested: “The SPX is testing nearby support at 2,431 with lower support established at 2,385-2,401. The NDX has so far held support at 5,606-5,691 (with lower support at 5,568) but has been unable to overcome nearby resistance at 5,779.

“Finally, the RUT is again approaching the zone of support at 1,385-1,397 and the bias remains bullish while above this zone. Seeing buying pressure emerge on a test of this support would confirm the larger bullish scenario,” Stovall added.

Have Home, Will Buy

Homes flew off the block in May and at record median prices, according to the National Association of Realtors’ monthly analysis. Sales of existing homes unexpectedly climbed to their third highest monthly level in a decade at 5.62 million as potential homeowners appeared quick to snap up what little housing stock was available.

And there apparently wasn’t much, NAR said. The number of new homes on the market in May rebounded by 2.1% after a notable fallback in April. But on a year-over-year basis, supply shrunk 8.4%, making it the 24^th straight monthly drop in housing inventory. Perhaps it’s not terribly surprising that properties typically stayed on the market for 27 days—the shortest time period recorded since NAR first began tracking it in May 2011. In some areas, home were on the market for a mere 20 days.

That tight inventory might be a nightmare for buyers, but sellers are reaping the rewards in the form of higher selling prices. The median home price reached a new peak at $252,800, up 5.8% over May 2016.