Energy, two ways
01/09/19

●Rebounding crude oil touched a technical barrier yesterday

●PSX has rallied with crude oil in recent days

●Call/put ratio could be highlighting a short-term bullish sentiment peak


 

Thanks to crude oil’s first real rally (16%, nine days and counting) since last summer, energy stocks have been the strongest sector in the S&P 500 (SPX) for the first five trading days of the year.

Of course, crude oil got drilled in the final quarter of 2018, sliding nearly 45% from early October to December 24, when February WTI crude futures (CLG9) hit $42.36 before plugging the leak:

February WTI crude oil futures (GCG9), 4/2/18–1/8/19. Crude oil futures price chart (GCG9). Testing resistance?

Source: Power E*TRADE


On the stock side of the equation, while every petroleum company may be a unique entity, it’s a little much to ask any stock to shrug off a 45% drop in the price of the commodity it attempts to sell for a profit. Hence the declines in most oil-related stocks, including Phillips 66 (PSX), which fell around 29% from October 3 to December 24:
Phillips 66 (PSX), 10/2/18–1/8/19: Phillips 66 (PSX) price chart. Rebounding with oil.

Source: Power E*TRADE


Like most other energy stocks, PSX has enjoyed a nice rally since Christmas Eve, gaining a little more than 9% as of yesterday. Not to throw sand on a gushing oil derrick—who knows whether the late-December oil low will turn out to be a longer-term bottom?—but yesterday’s price action may have had some traders considering the possibility that both crude and PSX are susceptible to at least temporary downturns.

The crude oil chart shows the market’s rally yesterday took it to within a nickel of the $50 mark—and more importantly, toward the lower boundary of its November-December trading range—a technical zone some traders would expect to provide at least temporary resistance to further crude gains.

And then there was yesterday’s options activity. On the same day PSX hit an 18-day high of $92.37—the stock's eighth-straight higher high—PSX call options volume outpaced put volume by more than 20 to 1:

LiveAction scan: High call/put ratio. Traders favored PSX calls.

Source: Power E*TRADE


While more calls being traded than puts may appear to be a bullish indicator—and it can be—in the context of a stock that has enjoyed a robust up move, it can also be a sign of a temporary bullish sentiment peak (just as a high put/call ratio after an extended slide could be interpreted as a sign of extreme pessimism).

Finally, don’t forget the larger macro climate. For a few months now, shifting sentiment surrounding good-one-day-and-bad-the-next trade headlines has driven many swings in US stocks, and to a lesser extent, oil. Even yesterday’s intraday stock-market swings were attributed to be at least partially driven by hopes and fears regarding the current US-China pow-wow.1

In short, we’ve seen this movie before. To date, past trade meetings have failed to deliver on their promise. Yes, this time could be different—in which case both equities and oil are likely to get a bullish bump—but another disappointment could weigh on both markets, at least until a new catalyst emerges.

Market Mover Update: Cigna (CI) extended its consolidation yesterday, the fifth day out of the last six the stock has traded within the December 27 high-low range.

Today’s numbers (all times ET): EIA Petroleum Status Report (10:30 a.m.), FOMC minutes (2 p.m.). (Reminder: Certain economic reports may not be released as scheduled during the government shutdown.)

Today’s earnings include: Constellation Brands (STZ), Lennar (LEN), Bed Bath & Beyond (BBBY), KB Home (KBH), Progress Software (PRGS), WD-40 (WDFC).

 

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1 MarketWatch. Stock markets lose some altitude amid U.S.-China trade talks, government shutdown. 1/8/19.