What’s next? Why the pain trade may still be higher

What’s next for stocks? The pain trade is still higher. The first seven weeks of the year was a total washout. But things have changed a lot since mid-February:

Since Feb. 11 bottom

S&P 500: up 10%

Eurostoxx 600: up 12.5%

Oil: up 47%

A lot of traders and funds are down 3, 4 ,5 percent or more this quarter, at a time when the S&P is down only 1.4 percent and climbing, sitting at the highest level since the first week of January.

Upside days like this are very important, because we are approaching the end of the quarter, so these types of days will force in traders who are under performing.

What’s next? Look at the three biggest issues this year for the markets, and for earnings:

1) slow global growth/recession fears

2) oil weakness

3) dollar strength

Slow global growth is certainly still an issue, but the economic stats in the U.S. certainly do not indicate a recession, and that fear has certainly abated somewhat.

The dollar rise was a major issue for most of last year, but the rise stopped in the middle of last year—it’s been mostly sideways since then. Down would be better, but not going up is an improvement.

Oil is the big story, up nearly 50 percent above the $26 level we saw a month ago.

This goes a long way toward explaining the slow melt-up in the markets: recession fears receding, dollar stabilizing, and oil off the lows are all positives for future earnings trends.

If these trends continue, earnings will stabilize, particularly for Energy and Materials. That’s big news. And that’s why Energy and Materials have outperformed.

The big caveat, of course, is “if” they stabilize. Let’s take just one example: oil. We had exactly this conversation about oil stabilizing one year ago. Didn’t happen.

In March, 2015, oil hit $45 (from almost $100 six months earlier) amid much wailing and gnashing of teeth. Six weeks later, in early May, it was back at $60, and plenty of people announced that the bottom was in. This was a period of much buying in the Energy Sector ETF as many tried to buy the bottom.

It worked, but only for a while. The XLE topped out in May. By June oil was again moving down. By August it was below $40. Then rallied again through the late summer before bottoming…again…at $26 in mid-February.

In other words, a lot of broken dreams. But those scars may be the best thing going for the markets. Having been so badly burned,

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