Crude Oil Under Pressure From Rising US Production

Crude Oil is about to break its 13 month uptrend as rising US crude production is starting to break down the price of Crude Oil. This is despite OPEC announcing a supply cut some months ago to help stabilize the price of Crude Oil. 

If you take a look at the chart below of US  Crude production and Oil Rig count within the US, they both seemed to level out around September / October 2016 just as the last leg of the downtrend  of Crude Oil was playing out. Since making the lows late last year the rig count has been steadily rising with production levels rising along side the rig count albeit on a 1 - 2 month lag.

Record US Crude Production Leads To Record Glut

Since US crude oil production has been soaring for several months now, inventories have also been rising along with rising production. Compounding the issue is the US economy which has been slowing for close to two years now. Now the decline in the US economy is accelerating consumption demand for gasoline within the US is also falling. Hence you will notice on the chart below on the right the sudden spike higher in inventories. 

Crude Oil Monthly Chart Review

Since making multi year lows back in February 2016 touching USD $26.14 a barrel, Crude Oil had been steadily climbing for around 13 months. After closing above its downtrend line back in April 2016, Crude continued to march higher for the remainder of 2016 and into early 2017. With just 1 trading week left in the month of March, unless there is a major reversal this week Crude Oil is set to close below its 13 month uptrend with a large red candle.

Crude Oil Heading Towards $41.50 Target

Based on the current outlook of the Monthly chart with a clear break of the uptrend currently occurring for Crude Oil, the next level of support on a monthly chart is around the $41.50 - 60 level which is another $6.50 - $6.60 or 13.75% lower from the current price.

Looking at the momentum indicators below, they are both supporting the current weakness in the price, as Momentum even though is still positive is heading back towards zero. The stochastic momentum indicator is also showing that based on the current price of $48 would form a bearish cross. (See circled area within Stochastic indicator) Monthly stochastic indicators are usually more reliable indicator of change of trends as they are much longer time frame and take a long time to form.

Hedge Funds Change Direction As Crude Oil Prices Shifts

Up until as recently as February 2016 Hedge Funds had placed a record amount of long contracts (betting on higher prices) for Crude Oil. Since then Hedge funds have begun to reverse their bullish bets setting a new record for reducing the bets for higher prices. The swift change in sentiment among Hedge Funds and Traders was due to the price falling below the physiological $50 level.

Crude Oil - Weekly Chart Review

Taking a closer look at Crude Oil via the weekly chart you can see that the price tried to break higher numerous times back in January and February this year. However after reaching the the $53.80 - $53.95 level on several occasions the price collapsed a few weeks with a long red candle which I have circled on the chart.

Momentum Falls Below Zero

Momentum is currently sitting at -5.74 on the weekly chart having closed below zero in the first week of March as the bulls became exhausted and finally gave in to lower prices.

The weekly Stochastic momentum indicator has been falling for several weeks now confirming the weakness in price. Since both indicators are supporting the falls in price on the weekly and monthly chart, it suggests that there is a high probability that the weakness in Crude Oil will continue over the medium to long term.

Since Crude Oil has confirmed a close below the weekly uptrend 3 weeks ago, the next level of support on the weekly chart is $40.50 a barrel.

Watch For A Surprise Reversal Above $54

Although very unlikely to occur over the coming weeks, I suggest watching out for a potential reversal in price back to the current resistance level of just below $54 a barrel. There may be another attempt to break above $54 but will unlikely succeed with current oversupply issues facing the market with rising US production.  The reason why I suggest looking at for the reversal is if OPEC announces further cuts to their supply to attempt to stop the falls in price.

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Rising Rates About To Crack The US Economy Under Record Debt Levels

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Russell 2000 Bullish Run Looks Tired As Momentum Falls

Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

US Interest rates have been steadily rising since the lows in July last year, as the market reacts to both inflation pressures, FED commentary and 2 rate rises in 15 months. As a consequence interest rates have risen around 1.2% for US 10 year Government bonds since July 2016. Rising rates has created a major headwind for the US economy, as the weight of the massive debt levels for consumers and companies are starting to have a weakening effect on demand dragging the US economy towards slower growth. In spite of slowing growth economy the US stock markets are or near all time record highs as bullishness over the Trump presidency have overridden a weakening macro environment as stock investors look to the future with optimism.

Market Pricing 100% For FED Rate Rise For March

Over the last few weeks the probability of FED rate rise in March has been climbing, as a series of press releases and comments from various FED officials, including FED chairperson Janet Yellen have shown their eagerness to raise rates this month. Due to FED officials comments the market has priced in a 100% probability of rate rise when the FED holds their Federal Open Market Committee (FOMC) meeting and release their statement on the 15th March US time. 

US  Government 10 year Bond Yields Set To Break Out Towards 3.00%

With the recent talk regarding interest rate rises by the FED this week and the market now pricing a 100% certainty of FED funds rate rising by 0.25%, Government bond yields have once again started to climb higher for two straight weeks reaching previous resistance of 2.62% last Friday. (See chart below)

The important factor to note for the 10 year bond yields is if the 2.62% level is broken and closes above the resistance level indicated for the week, we will see interest rates move progressively higher towards 3.00% which is the next level of resistance.

Higher Rates To Hit Corporate & Consumer Credit Debt At Record Highs

If US Government bond yields move towards 3.00% over the coming months, a situation which is likely if the FED raises rates this week. This is going to have a major effect on slowing the US economy even further. The extremely high debt levels in the US, that were built up during a low interest rate environment created by the FED is now beginning to cause some serious problems for the economy and eventually stocks as well with small increases in rates having a larger impact on considerably higher debt levels.

The reason rising US Government 10 year bond yields is such an important factor in determining the health of the US economy, is because the majority of debt products for consumers and companies are priced from Government 10 year bond yields. In other words everyone will experience a rate rise and be negatively effected because the US is drowning in debt, with consumer credit and companies debt levels excluding financials are at record highs. (See charts below)

Crush The Market addressed the negative effects that a significant rise in rates would do towards the US economy back in November as rates began to spike higher in November with the election of Donald Trump. To view this article click the link below:

Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy

Since November's article the rise in yields has played out as predicted with a slowing in a number of key macro economic data announcements, as the economy continues to slow in a rising interest rate environment causing pain for consumers, companies and the economy overall.

Consumer Credit  Debt Led By Student & Auto Loans

The picture is no different for the average consumer who is struggling under record levels of debt, with debt levels rising by approximately 1 trillion since the previous peak reached before the global financial crisis in 2008 & 2009.

The majority of the gains in debt levels have come across from an exponential increase in student debt as tuition fees for college are far outpacing CPI increases. The other main contributor for such a significant rise in consumer credit has been the boom in auto loans to the average consumer. Auto sales had previously been booming from increasing in credit for a number of years. Now as consumers are tapped out with much more debt since 2009, delinquencies are rising in the auto loans market as higher interest rates are biting hard on consumers disposable income.

The rapid increase in debt since 2009 together with increasing rates since July last year, has already been felt within the economy as various parts of the economy are now showing further continued weakness.

Higher Rates Slowing Lending Growth For Consumers

The rise of around 1.2% in US Government 10 year bond yields since July has already started to impact demand for more debt by consumers over the last year. Since the start of 2016 loan creation growth has slowed dramatically from between 9 - 10% per year to a current growth level of between 4% - 4.6% pa. Although the growth rate are in the positive the accelerating of debt growth levels is impacting retail sales within the economy. For example auto sales from the Big 4 auto manufactures have fallen by up to 11% in January 2017 from a year ago. To view auto sales data shown in my recent US economy article Click here.

Atlanta FED Slashes Q1 GDP Forecast to 1.2%

In the beginning of February this year the Atlanta FED forecasting team had set Q1 GDP as high 3.4%. Since February economic data has been released showing further deterioration and slowing in the economy with economic data missing expectations. As a result of this the Atlanta FED has had to  continually reduce their forecasts all the way to 1.2% as of March 8th. Depending on pending new economic data releases in the coming weeks we could see Q1 forecast fall below 1%.

US Gasoline Sales Begin To Fall Again

US Gasoline sales have been in structural decline for several years now, as the chart has shown below falling by over 50% since 2005.  After reaching the lows in 2014 gasoline sales began to start rising again as the economy began to gather pace as jobs and debt accumulation began to accelerate. However recent data has shown Gasoline retail sales have once again resumed their downward trend and starting falling as weakness in the economy  from higher rates is started to effect consumer demand.

Federal Government Receipts Now Negative Y/Y - First Time Since Last Recession

Similar to Gasoline sales US Federal Government receipts were growing strongly up to 2014 reaching a growth rate close to 14% y/y. Since 2014 recent high Federal Government receipts have been falling dramatically over the last 2 years, having just recently turned negative falling -1.1% Y/Y for the first time since the last recession in 2008 /9. (See chart below)

Having a closer look at the chart on the right hand side, you will notice that the majority of the decline in growth rates occurred over a relatively short time frame in 2016. This coincides with the similar time frames when interest rates stopped falling and began to rise rapidly in the second half of 2016.

US Restaurant Operators Same Store Sales Falling

The most recent data available for restaurant same store sales has been released, showing that December 2016 same store restaurant sales are the weakest they have been for in 3 years. In addition Q4 comparable sales and traffic is also down from a year ago, indicating that the restaurant industry is reeling as consumers cut back spending out for food.

 Does A Rising Interest Rate Environment Matter To Stocks?

According to history a rising rate environment has serious implications to the future performance of the market. Since the 1970's 7 out of 8 occurrences where interest rates cycles began to tighten resulted in some large corrections in the stock market. With the last tightening cycle resulting in a 56% fall in the markets in 2009.

The tightening cycle has been running for close to 9 months now as has already had a major impact to the grow rates of the economy slowing dramatically over the same period. With the potential for another rate rise occurring this week, its quite possible we could see 3% US 10 year Government bond yields in the coming months playing further havoc on the economy. Based on the last 45 years of data a tightening cycle in the US has not be very kind to stocks either as the economy reacts to higher rates.

Warning! - The Insiders Are Rushing For The Exits

Company executives are selling around 10 to 1 relative to buying trades of company stocks despite record prices for stocks. The buyer / seller ratio is also on a downtrend since peaking in late 2015  and the beginning of 2016 (See chart below)

When executives are selling in such large amounts it usually means they are seeing the writing on the wall for future earnings and prospects for the companies they run. Perhaps since interest rates are rising and the economy is slowing its starting to place pressure on future earnings targets. The next quarter earnings may provide further insights, especially since companies are conducting record amounts of buybacks that are financed from previously low rates of  debt.

The recent strong performance of stocks in late 2016 and early 2017 has masked a serious deterioration in the US economy that started as early as 2014 - 2015. With interest rates about to break out higher on the way towards 3% we could see the last legs of the economy knocked out bringing stocks down with them as earnings will start to fall again with weaker consumer demand filtering through to lower sales results.

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Stocks Bullishness At Record Highs While The US Economy Is Approaching Recession

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Russell 2000 Bullish Run Looks Tired As Momentum Falls

Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

US Stocks Bullish Run Fueled By Optimism Over Real Data

Since the election results in November US soft data (survey / optimism data) has deviated from hard data (actual US economic data). More importantly since December hard data has been falling as the economic news has deteriorated. Whilst soft data has continued to shoot higher along with a very bullish stock market. 

The Russell 2000 Index (Small Cap's) review shown below will show a very strong bullish uptrend. This pattern is quite similar to the 3 main stock indices DOW, S&P 500 and the Nasdaq. This highlights that the recent market surge in US stocks is more a function of market euphoria and optimism rather than actual improving economic activity and growth within the US economy.

Russell 2000 - RUT (Small Cap's) Chart Review

Monthly Chart

The Russell 2000 (RUT) has been in an uptrend for several years now as seen in the chart below. After a 3 year consolidation pattern of mostly sideways action between December 2013 - October 2016. The RUT index broke out of resistance of 1252 in November last year after the US election result win of Donald Trump, as all indices moved higher.

Currently the RUT has established a new uptrend within its larger long term uptrend shown with the blue line on the chart below. This uptrend started after the index gave a false signal when it closed below support of 1100 back in January 2016. After hitting the lows one month later the index has been steadily climbing.

Momentum Stalling - Consolidation Or Pullback Ahead

Since the RUT has had a strong 13 month rally in prices, the momentum indicators shown in the monthly chart are indicating exhaustion of the current rally.

I have circled both the momentum and Stochastic indicator to show that both are indicating a reversal of the strength in the market. Momentum indicator is still high however has pulled back to 2.80. The stochastic currently is sitting at a bearish cross as the blue line has crossed below the red. The last time the Stochastic had a bearish cross in July 2015 (circled on chart price action) the RUT index experienced a correction in prices for the next few months.

Since its only early March, it would be appropriate to wait for confirmation at the end of the month. If the momentum indicator is confirmed we could see the price action retrace back to the current uptrend shown in the chart at around 1315 - 1320 price range.

Since the bullish rally is quite strong its unlikely we will see a retracement back to support of 1252 - 53 level. Keep this target in mind though if we experience volatility in prices in March. Especially since the FED is likely to raise interest rates by 0.25% this month.

Weekly Chart

The weekly chart is showing a similar pattern to the monthly chart with the strong rally in prices since late November. Currently the price action is at or near the upper band of the uptrend channel shown in the chart below.

RUT experienced a strong burst in price around 5 -6 weeks ago as it made a new record high above 1400. Since then the price has been consolidating as it has struggled twice to climb back above the 1400 resistance level, with 2 weekly rejection patterns shown on chart as the price failed to stay above 1400.

Weekly momentum indicator is showing more weakness compared to the monthly momentum as it has made lower lows as it now sitting at 0.06 after reaching a high of 1.88 a number of weeks ago. This indicates the strength in the market that was present as the price made new record highs has disappeared. This explains the hesitation of the index to move higher.

The weekly stochastic indicator is also indicating exhaustion of the current rally and a consolidation or minor retracement in price is likely in the coming weeks.

The weekly chart pattern is confirming the monthly price action as the recent bullish run is running out of steam at least in the short term for now. Most likely the price action will move towards the lower uptrend channel band around 1300 - 1305 level. Based on the current bullish optimism its unlikely the price action will move towards support of 1282 - 84 level.

For confirmation of the retracement in price on the weekly chart, look for a weekly close below the 10 week moving average line which is currently at 1377 level.

Daily Chart

The daily chart price action as of last Friday's close on the 3rd of March is sitting just above its support level at 1,394. After breaking out approximately 2 weeks above the 1388 level the price action has been moving sideways and above its previous resistance level which is a bullish indication.

Contradicting the price action above the 1,388 level is that both Momentum indicators are showing a loss of strength in the market. Momentum has recently moved negative to -0.02 and the stochastic has also had a bearish cross a number of trading days ago. This means in the short term its likely we will see the RUT index close back below the 1,388 level.

If the index does close below 1,388 level, pay attention that the index stays within the previous sideways range between 1345 - 1,388. If the RUT index falls below 1,345 support level over the next 1 - 3 weeks the next target of support is 1,313.

Wildcard Event

Based on the strong bullish run of the RUT index and the major US stock indices, its unlikely we will see a retracement / fall in prices greater than 10% over the short to medium term time frame. However the FED will be meeting on the 14th & 15th of March to decide whether interest rates are rising in March. The decision will be made on the 15th. Based on prior announcements of a rate rise the market may experience with 1 - 3 days of the announcement a lot more volatility. If this was to occur we could see a mini panic of selling as the market digests the news. Therefore the wildcard this month is the FED announcement in the middle of the month that you should be weary of.

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Stocks Bullishness At Record Highs While The US Economy Is Approaching Recession

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Telstra Disappoints On Earnings Sending The Stock Below $5

Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.