December 15, 2014
Weekly Market Outlook
By Keith Schneider
Equity markets finally succumbed this week (SPY down 3.6%) to tanking oil prices and crashing junk debt pressured by possible defaults in the oil frack patch. This week’s drop was one of the worst weekly performance in years. One might attribute the glut of oil to the excesses of central banks and easy money, which enabled marginal players to borrow money and drill. The bubbles continue to float.
Sovereign junk debt that is dependent on oil revenues got hit hard. Global Macro Hedge Fund managers are weighing Geo-Political risk from those countries who rely on high priced energy to keep their economies running. Russia is particularly vulnerable in this respect. Low priced oil and economic warfare is pushing the Ruble to all-time lows. The Russian stock (RSX) market is down almost 40% from its July high, which was rather anemic to begin with. Adding to the mix is that the US Senate passed a bill offering military and economic support for the Ukraine, something that Putin will have to respond to. Putin’s oligarch allies must be rather restless. In the past Putin has upped the ante by saber rattling with an invasion or two. This plays well for one holding cards that are primarily gold and oil.
Speaking of economic warfare, Spain passed a law that Google will have to pay for linking to and aggregating original Spanish news content. Google responded by saying it will close down its Spanish news aggregation site, rather than pay the fees. This new law in Spain is not unique and several EU members including Germany have enacted legislation try to break Google stranglehold on search and aggregation. These attacks on parts of Google business model are having effect as it has dropped 15% since its highs in late July and Google is actually down on the year.
Historically speaking, the selloff of almost 5% in the SPY in December is widely believed to be just normal end of year tax selling and a buy opportunity. Historical performance for December is generally one of the best for US equities ( +1.6 %) and conventional wisdom is that once the tax selling abates which should happen this week, the market will rebound and close strongly for the year.
However the big question lurking for the Global Economy is whether or not the collapse of oil will push deflationary forces even further or potentially cause geo-political blowback, or will it be a net positive to the majority of global consumers.
Looking a bit more closely at the market internals, they have been faltering……One market indicator featured in our new Little Big View ( https://marketgauge.com/resources/littlebigview-2/?tab=5&chart=8 ) the New High / New Low ratio is indicating the market has run out of steam. Since the market hit new highs in July, it has failed both in September and December to confirm those new highs, a clear sign of longer term deterioration.
Furthermore, there have been 5 distribution days in the last few weeks and no accumulation days for the SPY. Will historical wisdom and stats play out or will the recent hysteria persist and turn into something more serious? Let’s go to this week’s video and drill down a bit more ...
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