Why a Bearish Oil Report was a Strong Bullish Signal for Stocks

Oil pumpjack against a blue sky
Credit: Shutterstock photo

As stocks were selling off on Monday, I wrote that the dip was driven by short-term trading factors, and that as long as the 50-Day moving average (MA) on the S&P 500 futures held, there was no longer-term cause for concern. I don’t wish to brag (who am I kidding -- of course I do!), but that proved to be accurate as the chart below for the E-Mini futures contract (ES) shows:

ES futures chart

The 50-Day MA held again, just as it already had on six separate occasions this year prior to yesterday’s crack at it. Then, in addition to that, yesterday saw another bullish signal in a place where not a lot of stock traders are likely to be looking right now: oil.

I learned early in my dealing room career that no matter how focused your actual trading may be, your research should be broad-based. No market exists in a vacuum, and an understanding of the other major traded markets -- such as bonds, forex, oil, and gold, as well as stocks -- gives you a sense of big money’s overall attitude to risk, an essential consideration in trading decisions in any market. Of course, every market has its own unique factors that influence it, so not every move in one has implications for another. Sometimes, though, you see a move that defies those internal influences on price which suggests that there is something else driving trading, something significant.

That is what happened in crude yesterday.

Every Wednesday, at 10:30 AM, the U.S. Energy Information Administration (EIA) releases its weekly report on oil inventories. Understandably enough, that report, which gives an insight into both supply of and demand for oil, is closely followed by traders and usually sets the market’s tone for at least a few days. Yesterday was different.

Yesterday’s EIA report showed that crude oil inventories in America had increased in the prior week, rather than decreased as the market expected. That would indicate that either supply was higher than anticipated, or demand lower. Either way, it should have been a bearish report for crude but, after trading lower in the first minute or two following the release, a period marked by the white arrow on the chart below, crude futures (CL) jumped:

CL chart

It gets even more interesting when you consider the details of the EIA report. It showed that crude input actually fell on a week-to-week basis, meaning that the build of inventories was related to weaker than anticipated demand, not excessive supply. In a week when we saw such a massive drop in both stocks and oil on Monday on fears of just that -- weak growth and demand -- you might expect bad news like that to trigger another serious selloff, at least in oil.

It didn’t.

The fact that it didn’t, and that crude just continued its strong rally after a very brief pause once the numbers came out, speaks volumes about traders and investors’ attitude to risk as the week has progressed. The big drop in risk assets that we saw on Monday is now viewed as a bit of a panic, and as a good opportunity to buy those demand-sensitive risk assets, even in the face of bad short-term news.

This is why, even though I am nervous about being close to all-time highs and above average multiples of earnings while a pandemic is still raging around the world, I have stayed consistently bullish on stocks, and still am. There is an innate belief that things are going to get a lot better. That optimism will inevitably fade at some point, whether or not it's tied to the pandemic, but as long as traders in all markets continue to ignore “bad” short-term news and focus on a positive outlook, stocks and other risk markets still have further to go.

Do you want more of Martin? If you are familiar with Martin’s work, you will know that he brings a unique perspective to markets and actionable ideas based on that perspective. In addition to writing here, Martin also writes a free newsletter with in-depth analysis and trade ideas focused on just one, long-time underperforming sector that is bouncing fast. To find out more and sign up for the free newsletter, just click here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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