THOSE WHO FORGET HISTORY ARE BOUND TO REPEAT IT
Last August, markets experienced a fairly robust selloff that spiked volatility to levels not seen since 2011. On September 7th of last year, I posted a blog titled "Trading in a High Volatility Environment..."
http://tancockstradingblog.blogspot.com/2015/09/trading-in-high-volatility-environment.html
It now seems like a good time to revisit this subject.
The post discussed the factors that I saw, at the time, contributing to the move; namely a China correction that still feels reminiscent of the 2001 tech bubble pop, and the prospect of rising domestic interest rates (now a quarter point reality).
With the benefit of hindsight, I now add the impact that falling energy prices have had on the high yield debt market. Larry Fink of BlackRock recently said that as many as 400 energy companies may default this year because they won't be able to meet their onerous credit obligations... to say nothing of the perpetual plunge in top line revenue.
http://www.bloomberg.com/news/articles/2016-01-27/blackrock-s-fink-says-400-energy-firms-may-not-survive-cheap-oil
Here's a look at the 6 month chart of the iShares High Yield Corporate Bond ETF, HYG:
FROM TEXAS FLOOD TO THE RIVER RUNS DRY
In the classic song, Texas Flood, Stevie Ray Vaughan sang about the despair of not being able to contact his lover because of raging flood waters. In reality, the state of Texas and other energy producing states exponentially benefited from elevated energy prices in the wake of the financial crisis... they were, in effect, flooded with petrol-dollars. However, the oil tide has since gone out and it's now painfully clear that many ugly firms were swimming naked... you may want to avert your eyes.
Low energy prices will typically create an economic stimulus; the equivalent of a tax cut for consumers across the socioeconomic landscape. And while non-energy regions like California and New York will benefit from lower input costs, the ripple effects of a pricing paradigm change may wipe out the gross benefit of cheaper gasoline... at least in the short term.
A RUMOR'S NOT A RUMOR THAT DOESN'T DIE
From a market perspective, these three factors (China's correction, domestic interest rates and cheap oil) don't appear to be going away anytime soon. Equity prices rebounded relatively quickly following last August's selloff (though never eclipsing previous highs) but that hasn't happened yet this time around and it seems as though market participants are tempering their expectations.
The S&P had a nice boost on Friday and has moved inside the, now wide, 20 day/50 day moving average gap:
See the following post 'The Fill Gap Pattern' for why this is noteworthy:
http://tancockstradingblog.blogspot.com/2015/09/the-fill-gap-pattern.html
My suspicion is that the S&P will consolidate in this range, using the respective moving averages as support and resistance, before finding direction again.
It also appears as though the market has set a new long-term support level at 185 on the SPY; should it break out below this point, another round of high volume selling could ensue.
Last August, markets experienced a fairly robust selloff that spiked volatility to levels not seen since 2011. On September 7th of last year, I posted a blog titled "Trading in a High Volatility Environment..."
http://tancockstradingblog.blogspot.com/2015/09/trading-in-high-volatility-environment.html
It now seems like a good time to revisit this subject.
The post discussed the factors that I saw, at the time, contributing to the move; namely a China correction that still feels reminiscent of the 2001 tech bubble pop, and the prospect of rising domestic interest rates (now a quarter point reality).
With the benefit of hindsight, I now add the impact that falling energy prices have had on the high yield debt market. Larry Fink of BlackRock recently said that as many as 400 energy companies may default this year because they won't be able to meet their onerous credit obligations... to say nothing of the perpetual plunge in top line revenue.
http://www.bloomberg.com/news/articles/2016-01-27/blackrock-s-fink-says-400-energy-firms-may-not-survive-cheap-oil
Here's a look at the 6 month chart of the iShares High Yield Corporate Bond ETF, HYG:
FROM TEXAS FLOOD TO THE RIVER RUNS DRY
In the classic song, Texas Flood, Stevie Ray Vaughan sang about the despair of not being able to contact his lover because of raging flood waters. In reality, the state of Texas and other energy producing states exponentially benefited from elevated energy prices in the wake of the financial crisis... they were, in effect, flooded with petrol-dollars. However, the oil tide has since gone out and it's now painfully clear that many ugly firms were swimming naked... you may want to avert your eyes.
Low energy prices will typically create an economic stimulus; the equivalent of a tax cut for consumers across the socioeconomic landscape. And while non-energy regions like California and New York will benefit from lower input costs, the ripple effects of a pricing paradigm change may wipe out the gross benefit of cheaper gasoline... at least in the short term.
A RUMOR'S NOT A RUMOR THAT DOESN'T DIE
From a market perspective, these three factors (China's correction, domestic interest rates and cheap oil) don't appear to be going away anytime soon. Equity prices rebounded relatively quickly following last August's selloff (though never eclipsing previous highs) but that hasn't happened yet this time around and it seems as though market participants are tempering their expectations.
The S&P had a nice boost on Friday and has moved inside the, now wide, 20 day/50 day moving average gap:
See the following post 'The Fill Gap Pattern' for why this is noteworthy:
http://tancockstradingblog.blogspot.com/2015/09/the-fill-gap-pattern.html
My suspicion is that the S&P will consolidate in this range, using the respective moving averages as support and resistance, before finding direction again.
It also appears as though the market has set a new long-term support level at 185 on the SPY; should it break out below this point, another round of high volume selling could ensue.
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