One of the areas of the market that continues to struggle is oil. OPEC recently pushed the price of WTI crude above a prior high, but that has not held. I got an email this morning from an oil and gas friend asking why his stock has dropped 20% recently. It was a small Canadian Oil and Gas company, but the same thoughts work across the spectrum. Why are oil and gas companies slipping with tight inventories?
Let’s use a company like COP. The stock continues to make lower lows and lower highs. The relative strength shown in purple continues to underperform. Until the stock can start outperforming the S&P 500 it’s going to be difficult to attract capital. The outperformance would show when this area chart in purple starts to turn up. Momentum shown by the PPO is rolling over here at a similar level to late January. That could change at any time, but it hasn’t started yet.
So is this an isolated picture? Let’s look at the crude oil markets. Here is Brent crude. Brent continues to underperform the $SPX. Brent has been stuck with a price high around $87 and the recent March move by OPEC got price back up to the highs of the range, but it couldn’t break out. Momentum (PPO) is rolling over.
On this side of the world, we focus on WTI. Here is the chart for $WTIC. This chart continues to underperform the $SPX as well. However, price actually broke out above the previous highs around $81. Currently this looks like a failed breakout. Failed breakouts are often a better clue as to the direction and at this point, lower seems to be winning. What would it take to change my mind? If oil can make a higher low and then get back above the $81 level, that makes the price action a lot more interesting. PPO is rolling over, suggesting the momentum is waning.
We can look at the oil producers ETF. It continues to weaken and has not been able to get back to prior highs, even though OPEC has taken 3 million barrels per day off the market.
However, for me, oil is one of the better economic indicators and these charts above all look weak, confirming the problem for the broader economy. Economic activity is declining and oil is telling us very clearly, demand is weaker.
When I look at the $SPX, this chart is starting to see what oil is saying. It is testing prior highs, but after three weeks here, it is struggling to break out so far. PPO is rolling over, and those sell signals have been pretty helpful indicators for upcoming market weakness.
This is not a doom and gloom forecast. It just shows the market is trying to price the economic slowdown, and crude continues to tell us that demand is slowing. When oil and oil producers start to base and breakout to the upside, I’ll be a lot more comfortable about the broader economy in North America starting to accelerate.
Greg Schnell, CMT, MFTA