How the Price of Oil Could Impact the Stock Market in the Coming Weeks

NYSE: SPY | SPDR S&P 500 ETF Trust News, Ratings, and Charts

SPY – After weeks of the S&P 500 (SPY) trending higher, we are hitting the first rough patch in a while. It’s not showing up too much in the indices but we are seeing profit-taking in some of the big winners over the past couple of months. This includes oil which is now down to $77 from a high of $85. It also makes me feel good about taking profits a couple of times over the last few weeks in energy. In this week’s commentary, I want to talk about some new developments in energy, some economic positives and update our market outlook. Read on below to find out more….

(Please enjoy this updated version of my weekly commentary published November 18, 2021 from the POWR Stocks Under $10 newsletter).

Over the last week, the S&P 500 is up by about 1%, however this is masking weakness under the surface as shown by the Russell 2000 which is down by 1.8%.

Of course, this is a change in behavior from the last couple of months which was marked by outperformance in small and mid-cap stocks which dominate the universe of stocks under $10. But it is similar behavior to what we have experienced for the bulk of 2021 – strength in large caps while small and mid caps are range-bound.

Currently, I am seeing this as more of a pause for the market to catch its breath rather than any sort of meaningful inflection point.

Energy

Last week, I wrote about oil:

In fact, it’s fair to say that oil is possibly forming a double-top. Too soon to say decisively or with certainty but it’s something to monitor. Obviously, this would have implications for our energy positions and also would set up a nice buying opportunity after a pullback.

We’ve reduced our energy position, and my gameplan is to pay close attention to how it does as it hovers around the important, $85 level. A break above $90 and we could be at $100 in a blink and a break below $80, and we would have a chance to add back shares at attractive levels.

We ended up breaking $80 much quicker than expected and are currently at $77. Last week, I was confident about increasing energy exposure if oil got to the low $70s. This week, I’m not as confident.

First, I want to make clear that I still see oil going above $100 and possibly well above this figure during this bull market given that capex has been at low levels for nearly a decade.

BUT I see some reasons for caution in the short-term.

  • We’re getting dollar strength, in part due to Fed tightening, which is putting downward pressure on the commodity complex.
  • Oil has made a double top which tends to be an intermediate top even in a bull market.
  • I’ve speculated that the bottlenecks in the economy improving could lead to some relief in energy prices.
  • President Biden has talked about a coordinated release from the SPR.
  • We’re seeing signs of increased shale production.
  • Finally, energy was bid up on tight inventories and fears about a cold winter. So far, the weather has been quite mild and looks to be for the rest of November.

None of these are reasons to become bearish on oil, but they are certainly good reasons to be less bullish.

Still, this is a topic that I will regularly cover in these commentaries.

Silver Linings

I did want to note two positive news items that could also be opportunities for our positions.

One is that recent reports are showing a big improvement in the semiconductor situation which constrained auto production. At full capacity, the US can produce about 19 million cars. Last month, it produced 13 million.

This increase in auto production will be a major opportunity for certain companies that I’m monitoring.

Another is that while inflation remains a major concern and headwind. I see that on the margins, things are getting better. This is evident with the auto production issue as used car prices are one major inflationary component. The strong dollar and oil dropping 10% are also helpful.

Finally, I still believe that capitalism works and higher prices will be met by entrepreneurs who increase production to take advantage of the opportunity. If this process is broken, then it truly is a deeper concern.

Outlook

The overall outlook on the market remains bullish, but we are certainly going through a pullback for small and mid-cap stocks.

Thus, it’s likely we see a higher level of activity as we make necessary adjustments.

What To Do Next?

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All the Best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter


SPY shares were trading at $470.55 per share on Friday afternoon, up $0.82 (+0.17%). Year-to-date, SPY has gained 27.09%, versus a % rise in the benchmark S&P 500 index during the same period.


About the Author: Jaimini Desai


Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...


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