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Over to The Veteran today for his take on the drivers behind the recent S&P rally...
The S&P 500 index moved to new all-time highs last week, posting 7 successive up-days as it did so.
Uptrends in a market are defined by technical analysts as a series of higher highs and higher lows and that is exactly what we saw from the S&P 500 during this period as this table shows:
Posting 8 consecutive higher highs is quite a feat for the index, particularly in a climate where investor sentiment has been fitful and uncertain of late.
In fact the only fault we could find with recent price action in the S&P was that the weekly close, on the 22nd of October, was almost 15 points below the day's high.
That could suggest that the market was feeling indecisive about which direction it wanted to move in next.
There is also a slight concern, that last Friday's low was at a lower level than the lows posted on the two previous days of trading which again could be a negative indicator
With that in mind, and to confirm the new uptrend, or at least make us believe it's going to be in place for a while, technicians would like to see 4560 taken out, and a close in index, at no lower than 4550 thereafter.
The S&P obliged yesterday but not with any great conviction...
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What's been driving the upside?
At a sector level the S&P 500 Energy stocks have been amongst the best performers. The energy sector index has risen by +20% over the last 30 days.
We have also seen a strong performance by Financials. Their S&P sector index is up by +9.33% over the last month, buoyed in part by impressive Q3 earnings at some of the major banks.
Other sectors that have impressed on the upside include Materials and Industrials each of which has posted gains well above 5.0% over that 30 day period.
Interestingly Information Technology, which has led the market for so long, did not post major gains. Though it did add +2.46% over the period.
Of course, while numerically smaller than those seen in other sectors, those gains can have a bigger impact on the market simply due to the weighting of some of its components within the overall index.
In a cap weighted index such as the S&P 500 the rule of thumb is that a large move in a sector or constituent with a small market cap can often be outweighed by a much smaller move in stock or sector with a much larger market cap.
There has been much debate about where leadership in the S&P 500 will come from, if we are to take another leg higher from here.
Much of that discussion has centred on the price of oil and the Energy sector.
JP Morgan recently pointed to the drawdown of oil supplies from Cushing Oklahoma, the hub of US oil storage, and the delivery point for WTI crude oil futures saying that
“At the current rate of drawdowns we could just be weeks away from Cushing effectively being out of crude oil”
Supplies of oil in Cushing's storage tanks should ideally be no lower than 20 million barrels at this time of year.
And so the unexpected drawdown of more than -4.0 million barrels, seen over the last two weeks has caused some concern among traders.
This draw on supplies took the surplus of oil held at Cushing to just 31.0 million barrels and comes at a time when crude oil prices are rising sharply.
For example the price of WTI crude has risen by +14.27% in the last month and by some +72.63% year to date, driven by demand from re-opening economies and supply shortages elsewhere, for example in European energy markets.
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Two charts from the US Energy Information Administration (EIA) shine a light on what's going on in oil right now
The first chart (👇) provides us with a comparative view of oil prices per gallon this year and last.
As we can see oil prices are rising quite steeply this autumn compared to the flatline they tracked a year ago.
This second chart tracks total US oil stocks against their 5 year average levels and we are very much at the lower end of the 5-year band.
In terms of the energy sectors impact on the market...
Bank of America noted the rise in oil prices and the positive impact that has on the earnings of energy companies;
However, the bank's analysts believe that this boost will not be felt as strongly by the wider economy and markets as once might have been.
The bank pointed to the fact that the energy sector now has a relatively small market capitalisation or weighting within the S&P 500.
And the fact that oil companies are exercising what it calls capital discipline, or if you prefer they are not spending any more money than they have to.
Shareholders have had terrible returns from energy companies for too long.
Pioneer CEO Scott Sheffield commented recently:
“Everybody’s going to be disciplined, regardless whether it’s $75 Brent, $80 Brent, or $100 Brent,”
“All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies.”
And that could limit the trickle down effect of higher oil prices as far as suppliers and other sectors are concerned.
Bank of America said that historically every +10.0% rise in the price of oil used to boost S&P 500 earnings per share, by +5.0%.
However, in those days sectors that benefited from higher oil prices such as Energy, Chemicals and Industrials made up about 20% of the index, whereas today they account for just 6.0%.
The net net of all this is that oil and other energy prices can and probably will be squeezed higher over the winter months.
However, that may not be positively reflected in the S&P 500 index as a whole
Therefore if investors want to play a rising oil price they may need to drill down to the sector or even individual stock level.
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