Wednesday’s oil smackdown continues in Thursday trading

Stocks try to recover, bonds continue to sink. The sky is falling for bullish investors. Or is it? Let’s check the McClellan Oscillator.

Wile E. Coyote must have added oil stocks to his portfolio at the wrong time. (Warner Bros. cartoon image mod. by the author)

WASHINGTON, March 9, 2017 – All of a sudden, crude oil prices have reversed field and are, at least temporarily, in the midst of a Wile E. Coyote-style cliff dive. Stocks and market averages have been following suit, and as of Wednesday’s close, the carnage was increasing.

Thursday trading action provided a marginal respite, though crude oil and precious metals continued their waterfall decline, with oil closing slightly below that current magical $50 line of support. Even so, however, all three averages closed marginally higher today, albeit very close to flatline.

In afterhours and European trading this evening, oil is trying to mount a feeble comeback, and early Wall Street futures trading indicates that Friday morning trading might open on the upside. But it’s where things end the day that counts.

On the side of the optimists is this latest, March 9, 2017 edition of the McClellan Oscillator, a remarkably prescient technical indicator your Market Maven has come to rely upon near both upside and downside market extremes. In today’s McLellan Oscillator chart (below), courtesy of (a subscription service), the sharp downward slope on the right side of the chart, which indicates recent trading action, tells the story of the tape:

McClellan Oscillator, COB March 9, 2017.

What that story tells us is that we are at or very near extreme oversold conditions, which invariably means that some kind of positive market bounce, perhaps a dramatic one, is either close or near at hand. The upside reaction could very well begin tomorrow, given that early (though not entirely reliable) reading of tomorrow’s trading futures.

On the other hand, things could get a bit worse before they get better.

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From a fundamental as opposed to a technical standpoint, the two main problems here involve the recent report of a massive increase in the amount of stored oil—implying that the U.S. and the world produced way too much crude last month for current prices to hold—and that ever-looming Ides of March Federal Reserve interest rate increase, which a now nearly-unanimous poll of analysts, pundits, sages and Zurich-based gnomes tell us is inevitable. Then again, a Brexit defeat and a Hillary Clinton victory were also inevitable, so you have to take this kind of bafflegab with a grain of salt.

On the other hand, since real money is involved, you can’t exactly ignore these prognosticators, either.

Our guess is that oil will stabilize near-term between $40-50 bbl. for West Texas Intermediate (WTI) and that the Fed will indeed jack those rates up 0.25 percent next Wednesday.

But look at it this way: Most American producers now say they can still profit if crude oil sells for at least $40 bbl. And, if you look at plummeting bond prices and absurdly rising yields, the market has very likely already overreacted to that threatened interest rate hike, and may breath a green ink sigh of relief when that interest rate increase actually occurs.

In the meantime, companies involved in the oil trade, bonds, high-yielding REITs and ETFs, and many banking and financial stocks have been taken out back and shot this week, leading us to take a few defensive actions in our own portfolios, which we detail in our companion column, to lock in profits and cover near-term losses.

But the McClellan Oscillator tells us that there will at least be a relief rally, and soon. So we’ve done what we’ve done. And now we await Friday’s Tale of the Tape.

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