Episode 19 – Damien’s Midweek Markets – How the price of oil might dictate where stock markets go next

The 19th episode of my weekly podcast show where I discuss what is happening in investment markets and what to look out for. Each show lasts between 10-15 minutes and is aimed at DIY investors (including novices) seeking contemporary analysis to help them understand how investment markets work. This week I explain how the price of oil might dictate where stock markets go next.

Click on the media player below to listen to Episode 19 of Damien's Midweek Markets podcast.

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Transcript - Episode 19 of Damien's Midweek Markets

Hello and welcome to the latest edition of Damien's midweek markets, which is the show where I talk about what's been going on in investment markets and what to look out for in the future. This week has been pretty much a repeat of what was going on at the end of last week. The S&P 500 (which is the US stock market) started to rally as I made the last show and what we've had since then is the S&P 500 has kept pushing higher. We had a big sell-off in May that was caused by Donald Trump starting (or reigniting) the trade war with China and also starting a new one with Mexico.

Since last week two things have happened. Donald Trump has relented slightly on the Mexican trade war issue that he was going to have about over immigration and so he seems to have come to some kind of agreement with them; the market liked that and the S&P 500 rallied as a result. It's quite interesting because it was an issue that he brought up and then seems to have semi rectified, but without any real solution being made public, other than on a piece of paper. The market has liked that, but the biggest thing the market liked was when the Fed suggested they would be prepared to cut the interest rate if required and if the economy was weak. Since then the S&P 500 has steadily marched higher. Surprisingly it broke above its 50-day moving average which is now at 2,873 and the market sits just above that. It tried to push above 2,900, and had it achieved that it would have opened the door to the possibility of trying to test the all-time highs we saw recently (around 2950 on the S&P 500).

What's happened since is the market has pulled back slightly because it's being built on a lot of hope. If you look at two other key markets. The 10-year US Treasury (which if you
go in your stock app is TNX) didn't rally significantly, it actually rallied only slightly. With a 'risk on' environment (when people like to take on equity exposure), they tend to sell US Treasuries and bonds, so the yields on US Treasuries will rise. They rose slightly but then they pulled back and we are still back to where we were this time last week, about 2.12%.

So although the equity market has been very optimistic the bond market hasn't been and perhaps it's unsurprising that we've run out of a little bit of steam in the sudden rally we had, because the rally we've had in the last week on US equity markets (and a lot of that bled over into other markets globally) has been quite significant. So it is still the case that the bond market and the equity market are in disagreement and we're still trying to work out which is
right.

On the S&P 500, the 50-day moving average is now acting as support, we've got to see if we can hold above that. If we break down below that, then that could open up for another sell-off. The 200-day moving average (which is of one of the key measures that people look at for a bearish to bullish momentum) is now down around 2,775, so that's something to keep an eye on. One of the biggest things to have a look at at the moment and one market in particular that
I'm looking at is the oil market. The price of oil since April has actually fallen 20%. We've gone from around $65 a barrel down to $52 which is about a 20% fall. That's actually classed as a bear market and in recent months if you were able to map the S&P 500 against the price of oil you could see there's a correlation.

I talk about this a lot with 80-20 investor members, the one thing you want to focus on is in
recent weeks that correlation has started to break. So the oil market has fallen while the S&P 500 has continued to rally, they have tended to move together in the same direction and it suggests something might have to give. With the oil price still continuing to sell off, the oil price
falling tends to be a sign of poor economic outlook because we don't need as much oil for various economic activities. That might suggest that we could have a recession on the cards so the bond market and particularly the oil market aren't necessarily backing up what we're seeing in equity markets.

So for now, keep an eye on the oil price (if you want to do that on your stock app you just have to type in CL=F). Elsewhere over in the UK the FTSE 100 rallied, it got above that key 7,250 level, trying to push up over 7,300 on the way to 7,400; it started to stall ever so slightly. The DAX has been rallying, it's been slightly overbought and so don't be surprised if we get a pullback. So right now the most interesting thing between now and next week is to keep an eye on the price of oil as it could give a hint to where stock markets might be headed. Once again we're now in a state of keeping a watch of what will happen next, will we break higher or lower?

That is it for this week as ever you can get in touch with me damien@moneytothemasses.com or on Twitter @money2themasses

Until next week