Is Oil Headed Higher For Longer?

1.) DOW – No one seems to care about the Dow Jones Industrial Average. All the other indexes have made new highs. But where’s the Dow? The Dow Jones Industrial Average hasn’t closed at new highs since February 10, and we’re already two-thirds of the way through May. Not necessarily bearish, just odd. I’ve commented in the past about not fighting the Dow. If the Dow starts acting differently than everyone else, it’s not a bad idea to pay attention. The Dow is important as a good representation of the big guys in Industrials, Multinationals, and Financials. Is this divergence a signal or noise? I’m not sure yet, but I do know that underneath the surface, things actually look pretty good. Breadth expanded, meaning more and more stocks have been enjoying the celebration, and equal-weight indexes are hanging in there. So it’s not just a few of the big names that are driving things. That’s not what a market top looks like from the inside. Market tops are narrow and suffocating. But, nevertheless, here we are. Internals are telling me: healthy bull market, keep going. But the Dow hasn’t confirmed any of it. There are definitely times in history where the boring old industrial names spent months doing absolutely nothing before suddenly becoming the life of the party again. But just know that if the Dow is missing in action for too long, historically that’s also been worth paying attention to. But for now, there’s plenty of evidence that supports the bull market.

2.) RATIOS – Recently, the drawdown in RSPD / RSPS (Equal Weight Discretionary / Equal Weight Staples) exceeded 15% while the broader index traded just off its highs. Since 2006, similar divergences have typically preceded some market weakness over the following 3 months. Dow lagging… Discretionary vs. Staples down… what is going on? Probably nothing other than some digestion ahead. After all, the market has moved up a fair amount over the last couple of months. It deserves a bit of a breather! For now, as noted above, the bull market is still on as the majority of the evidence supports it and CTAs are net buyers (shown in yesterday’s email) and, for now, the flows remain positive. Just be prepared for some potential bumpiness over the next few months.

3.) OIL – Is there a structural bid underneath oil (WTI) that will keep its price higher for longer? Maybe. But the fact that the US just incurred the largest draw on inventories on record (including the SPR) isn’t going to help bring the price down. The US is exporting like crazy. Why? We don’t have refining capability. Sounds crazy, and it is, but the last refinery in the US was built in the 1970s! And those refineries are not equipped to handle the lighter crude coming from fracking. Based on our own internal research (hat tip to our head analyst and equity trader, Jonathon Stump), there’s about zero chance of the US building the refineries to process what we get out of the ground domestically. 100% absurd, but it is what it is, and it is this state of affairs in the US that could put a constant intermediate to longer-term bid underneath oil. It’s never a straight line, so will oil go up or down from here in the short term? Yes. Right now, WTI (crude) has support at $100, $95, and $87, and resistance at $107.50. So far, for the short term, it’s continued to make lower highs since the end of last month. So breaking in either direction would be a tell. Let me know if you’re interested in our detailed analysis of the refining situation in the US.