The Energy Report - The Selloff

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The Selloff

Energy Strategist (06/30/2010)
"Yesterday, S&P500 closed at a new low for 2010. Technically, this move represents a break from the range in which the index has traded for most of the past two months. However, the break was marginal; the index finished the day slightly above intraday lows reached in May.

And the breakdown wasn't entirely convincing.

Oil was down yesterday but still traded close to $76 a barrel—roughly $10 off its May highs, but well above late-May lows in the mid-$60s. Oil prices and the stock market should be highly correlated right now; the fate of both markets depends on the health of the global economic recovery. Stock markets appear to reflect the prospects of a double-dip recession and major economic slowdown in China, but oil prices disagree: In recent weeks, a recovery in U.S. oil demand has been a major upside catalyst.

Another index to watch is the Dow Jones Transportation Average, a group that includes railroads, airlines and freight companies. Transports are highly cyclical companies that tend to get hit hard when the economy falters; many analysts regard the sector as a good gauge of economic activity. But the group failed to break its May lows and remains significantly above the 2010 lows set four months ago.

Most news outlets attributed the selling pressure to two factors: a plunge in the Chinese stock market and a big drop in the Conference Board's measure of consumer confidence. Both issues produced plenty of sensationalist headlines, but neither move is decisive.

The Conference Board's measure of consumer confidence fell from 62.70 in May to just 52.90 in June. [But] consumer confidence, much like consumer fashion trends, is highly volatile; investors shouldn't read too much into monthly fluctuations.

Chinese leading indicators were weaker than some had expected and suggest the economic growth is slowing from Q1's red-hot pace—this isn't new information.

The biggest factor behind yesterday's selloff in Chinese equities was technical. . .[the] US$23 billion Agricultural Bank of China IPO prompted investors to sell other holdings to make room for the banking giant.

. . .The breakdown in the S&P500 is marginal and hasn't been confirmed by several key indicators. It does little to change the short- or intermediate-term picture for stocks; Friday's employment report and next month's earnings releases will be far more important catalysts.

The most important piece of advice I can give: Don't panic as a result of these extreme one-day swings. Volatility will likely remain high through the remainder of the summer. . .Ignore the short-term news and sensationalist headlines and focus on the broader picture: This selloff is likely a correction of the bull market that started in March 2009, not the beginning of a new bear market."

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