Wednesday, July 2, 2014

Weak Crude Prices Offer Equity Dividend

Last week we looked at crude and I offered that technical developments suggested a rather stout pull-back was likely forthcoming, targeting $95 from then $105.95.  Since, there have been additional technical developments that help to support this prognosis. 

Following the bearish engulfing of June 25-26, there has been little repair.  The inability to recover to mid-$106 leaves longs in an increasingly delicate position.  Despite this increasingly unfriendly technical backdrop, ‘non-commercial’ accounts often called ‘large spec’ have added slightly to their net long position in the week ending last Tuesday (June 24).  These account types hold record net long positions. 

Tuesday’s low of $104.60 has held thus far today on the retest.  A push through this level leaves little in support till $103.60.  An upward sloping trend line may offer some support toward $101.33 today.  This trend line rises at about $0.09 per session.  

I wonder aloud if a sell-off in crude may offer a bullish dividend to equities.  There is the consideration that a lower crude price might mean some repair of geopolitical dislocation.  Additionally, a lower oil price would simply mean lower cost of operating for many firms, leaving shareholders a greater portion of gross revenues. 

S&P’s advanced to a new record high yesterday and settled higher on the day, breaking through a consolidation that briefly kept the advance from moving above 1970. 

Given the sweeping but misplaced negative connotations attached to currently low volatility levels accompanied with the bullish break-out, I am projecting a move of 3-5% in relatively short order for S&P’s.  The minimum objective would be 2010 and the maximum objective would be 2050.  A weaker crude price would likely aid this advance.    

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