Recession Fears Drag S&P, Crude Oil Futures
Weak economic data and more bearish news out of the financial sector has pulled down stock index futures, and the fear of recession has also put a lid on price of crude oil, at least for now.
S&P 500 futures closed higher Monday, January 14, and although technical indicators may be signaling a near-term low has been posted, the specter of the "R" word, recession, has pulled the market down again this morning. Momentum indicators, the stochastics and relative strength index (RSI) are turning bullish, a sign the market might be near a low. However, the March S&P contract needs a close above the 20-day moving average at 1456 to confirm that is it case. The March contract was recently trading down 12.75 at 1407.50. Watch for failed rallies today, and look for support at 1375.
The latest fundamental news has upped the odds the Federal Reserve will cut short-term interest rates at its policy meeting on January 30–and there's even been speculation they could cut before then. In the financial sector, Citigroup cut its dividend by 41 percent after writing down the value of subprime-mortgage investments by $18 billion, and reported a record loss in the fourth-quarter of $9.83 billion. Merrill Lynch said it will issue $6.6 billion in preferred stock to a group of investors to firm up its capital standing in the wake of massive mortgage-related write-downs.
Amid the housing market turmoil, it seems the consumer is holding back. Retail sales were unexpectedly weak in December. This morning, the Commerce Department reported retail sales dropped by 0.4 percent. Meanwhile, inflation seems to be under control–at least enough not to tie the Fed's hands from cutting rates this month. This morning the Labor Department reported the producer price index, a measure of wholesale inflation, fell 0.1 percent in December. The core rate, which excludes food and energy, was up 0.2 percent. The consumer price index is out on Wednesday, so we'll see if that price restraint is confirmed.
While crude oil peaked above $100 a barrel this month, that level has proven tough resistance amid talk a recession could dampen demand. NYMEX crude oil futures closed higher on Monday, but I see the gains as short-covering after several down sessions, and not new buying interest. If crude oil closes below $94.55, the 20-day moving average (old support, now resistance), I see the trend lower still, with $89.15 a possible target. The stochastics and RSI remain bearish. A move up to $97.97 would temper the bearish outlook. I see near-term resistance at $94.43, with support at $96 and $92.30. February crude oil futures are down this morning, recently trading near $92 ahead of a key inventory report coming up Wednesday from the Energy Department. Analysts are anticipating an increase in crude oil and distillate fuel stockpiles (which include heating oil and diesel fuel).
Good luck and good trading!
Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at jfriedman@lind-waldock.com.
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