Tuesday, April 12, 2011

Have The Wheels Come Off The Energy Train?

The market is lower in early trading, led down by the energy sector. But that is just one of the factors being cited for the weakness. Last night, Aloca (AA) led off earnings season with a mixed report. Earnings were solid, but revenues were a little light and the stock was met with selling. Today, it's stock is down -5%. Overnight, Asian markets traded sharply lower after Japan raised the nuclear crisis level to a maximum level of 7 (from 5) after data indicated that more radiation had leaked from the damaged reactors than first estimated. That makes this the worst nuclear disaster since Chernobyl. On the energy front, Goldman Sacks (GS) is being credited with calling for a substantial pullback in oil prices, and urging its clients to take profits. This is spurring heavy selling in the energy sector. Oil prices have fallen back below $106, while gold prices have pulled back near the $1450 level. The energy sector is down twice as much as the next sector (materials). Consumer staples stocks (food, restaurants, etc) are holding up the best so far. The 10-year yield has pulled back to 3.49%; and the volatility index (VIX) is spiking sharply today, up 11% to 18.44 (still below its 50-day). Trading comment: I have been talking about the market working off its overbought condition, but action like today will have people start asking how quickly we can be back towards oversold. The S&P 500 is just breaking below its 50-day average, while the Nasdaq is handily below its 50-day. If these technicals levels aren't recaptured by the end of trading, traders will likely adopt a more defensive stance in the near-term. The drop in oil prices is a positive for the consumer and the economy, if it sticks, but today it is causing so much profit taking in the energy and materials sector that it is weighing too heavily on the market. I think we need some good earnings reports followed by strong action in those stocks to boost bullish sentiment here.


Post a Comment

<< Home