Wednesday, May 04, 2011

Will Gas Prices At The Pump Fall?

The market is sharply lower in early trading, coming on the heels of a selloff in Asia overnight and a continued decline in commodity prices.

Commodities continue to trade lower, led down by silver after its historic runup. This shouldn't be surprising, as the pace of gains was clearly unsustainable. The question now is, is the top in for silver or is this just a correction?

Silver has just dropped below the $40 level; gold prices are lower to $1533; oil prices are down to $109.50; and gasoline futures are trading lower as well. Mastercard's spending report said that demand for gasoline has fallen recently, prompting some to speculate that we could see lower prices at the pump soon. Living in LA, this would be a welcome development.

In economic news, the ISM services index came in at 52.8, which is down from the 57.3 reported last month. Also, the ADP Employment change report showed private payrolls increased by 179,000 in April, but this is below estimates for 200,000.

There was a big takeover in the semi equipment space, with AMAT buying Varian Semi (VSEA) for a big premium. VSEA is up 51% today.

The 10-year yield is drifting lower to 3.22%; and the VIX is +3% higher to 17.27.

Trading comment: We have seen this action before. When energy and materials stocks lead the market higher, and then there is a big selloff in commodity prices. In the short-term, it takes everything down and related stocks selloff hard. But longer-term investors realize that lower commodity prices are a net positive, and that should improve consumer sentiment and help other areas of the market rally.

The S&P 500 recently broke out to new highs above 1343. So technical analysis says that the former area of resistance should now act as support on a pullback. We are just about there on the SPX, so we should see buyers step in soon.


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