Oil pivot

As central as oil prices have been to the inflation story that has dominated the markets this year, the market’s dramatic pivot over the past two days warrants a closer look.

On Monday, January WTI crude oil futures (CLF3) plunged more than 6% intraday to $75.27/barrel—then roared back to close near breakeven for the day, and followed up with a nearly 3% intraday rally on Tuesday:

A few highlights:

•At Monday’s low, the market had fallen to its lowest point since late September, which was crude’s lowest low since January.
•At Tuesday’s high of $82, oil had rallied nearly 9% off Monday’s low. (The market pulled back closer to $81 later on Tuesday.)
•On Tuesday, the Organization of Petroleum Exporting Countries and its allies (OPEC+) announced they had decided to stick with their established production cuts, rather than increase output.¹

A high-momentum bounce off a significant previous low—amid news that OPEC+ would not be pumping more oil in the near future—would certainly appear to fuel thoughts of potential upside follow-through, but some longtime traders would likely highlight reasons to take a more conservative view on the development.

In addition to the fact that OPEC+ can change its mind any time it wants to, Tuesday’s announcement meant the market was simply extending a production status quo that has, for the past several months, been met by sideways price action in the oil market.

Also, analysis of similar moves (e.g., a 1%-or-larger rally a day after oil hits its lowest low in at least a month) suggests the market’s near-term momentum over the next couple of weeks limited: Oil prices were up only 0.15% a week later, on average, and up only 0.14% after two weeks.²

Holiday (stock) shopping season: Given November and December have historically been two of the strongest months of the year for stocks, it shouldn’t be surprising that the period between Thanksgiving and Christmas has tended to be bullish. Compare the S&P 500’s (SPX) median returns for the 20 trading days (roughly one month) before and after Thanksgiving to its overall 20-day median return from 1942–2021:

The SPX’s median gain for the 20 trading days after Thanksgiving (1.6%) was bigger than both the pre-Thanksgiving median gain and the overall median 20-day gain. Also, the index was more likely to post a net gain during the post-Thanksgiving period: The index rallied in 56 of 80 years (70% of the time), while only 61% of 20-day periods from 1942–2021 were positive.

An interesting sidebar to this performance is that (in recent years, at least) the S&P retail sector has performed better in the 20 trading days before Thanksgiving (+2.5%) than the 20 after it (+1.6%). Also, the retail sector index was positive only 56% of the time in the post-Thanksgiving period.³ So, while the weeks between Thanksgiving and Christmas may be the busiest shopping season of the year, retail stocks haven’t necessarily been at the top of investors’ wish lists.

Today’s numbers include: Mortgage applications (7 a.m.), Durable Goods Orders (8:30 a.m.), Weekly Jobless Claims (8:30 a.m.), New Home Sales (10 a.m.), Consumer Sentiment (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), EIA Natural Gas Report (12 p.m.), FOMC minutes (2 p.m.).

Today’s earnings include: Deere (DE).

Holiday reminder: In addition to being closed on Thursday for Thanksgiving, US stock exchanges will close early (1 p.m. ET) on Friday.

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¹ Barron’s. Oil Rises as OPEC Reaffirms Commitment to Output Cuts. 11/22/22.
² Figures based on WTI crude oil cash daily closing prices, 1986–2022. Supporting document available upon request.
³ Figure based on S&P 500 (SPX) daily closing prices, 1942–2021. Note: Because Thanksgiving can occur on a different date each year, the post-Thanksgiving period may end a little before or after Christmas. Supporting document available upon request.