2016's First Stock Market Rally Catalyst - Inflection Point For Oil Inventory

Jan. 06, 2016 9:44 AM ETDIA, IWM, OIH, OIL-OLD, QQQ, SPY, USO, VTI, XLE, XLF, XOP6 Comments

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Summary

The path of stocks today has been deviated by China's yuan devaluation and the alleged hydrogen bomb test in North Korea.
However, in the after-market Tuesday, energy and stocks generally were indicating a positive open for today on another important catalyst.
Oil prices have been following crude inventory swings in recent weeks, which have been relative to weather swings.
Stocks have broadly followed oil prices in recent weeks due to the perceived importance to the broad economy, including the weighty financial sector.
Having reached seasonal peak oil inventory historically speaking, and with cold weather likely to persist, regular draws from inventory should provide support for oil prices and fuel for stocks.

Stocks have been shaken this morning by two issues, the currency adjustment by China and the alleged hydrogen bomb test by North Korea. Before those two events, it seemed stocks would have a catalyst to start a rally due to another critical factor. I believe an important inflection point is being marked now for crude oil inventory, and for a shift in flows toward regular draws from storage to serve as support for stocks possibly as early as later today, and if not, likely by next week.

Over recent weeks, draws and builds of oil inventory have been catalysts for gains and losses respectively in stocks. This has much to do with the perceived broad relevance of changes in oil prices to the economy and the financial sector. I have noted that the last several weeks' swings between builds and draws in oil inventory have coincided with extreme weather swings in North America. Last week's Energy Information Administration (EIA) data showed a surprise build in inventory, leading oil and stocks to give way through the last few days of 2015. It occurred during an extraordinarily warm holiday period.

Given that the weather is likely to be consistently cold for the next couple months, and the fact that seasonal peak crude oil inventory is behind us historically speaking, more consistent weekly draws from inventory should support oil and stocks. Obviously, there remain factors weighing against oil and stocks (as we've seen today), but the favorable turn in this important factor should weigh heavily at its inflection point here in January. It may even allow a January Effect rally to eventually begin.

5-Day Chart of SPDR S&P 500 (NYSE: SPY) at Seeking Alpha

Stocks have gotten off to a poor start to the year thanks to weak data from China and the coinciding sell-off in China stocks on the expiration of trading restrictions and the initiation of trading curbs. Then today's news relative to the yuan devaluation simply perpetuates concern. Still, it's important to note that the decline in stocks did not begin with the New Year. Stocks moved lower in the last two trading days of last year as well, as you can see in the chart. I believe the factor behind that was unfortunately too consistent with the soft China economic data, which perpetuated and accelerated the decline. Soft China economic data was consistent with a build in oil inventory reported one week ago, which surprised the market that had anticipated a draw from crude oil inventory.

As I introduced at the start of this report, oil prices have followed the weekly oil inventory data, and stocks have followed oil prices in recent weeks. Jim Cramer refers to it when often noting the "crazy world" where stocks follow oil lower despite the fact that most Americans benefit from lower gasoline and other energy prices. That crazy world is best evidenced by the trading around this data in my opinion. And those who have a grasp upon it can exploit it.

Historical trends show peak oil inventory is reached in late December, and so the weeks ahead tend to produce draws from inventory. Wild swings in temperatures over the last month or so have been consistent with swings in inventory. Uncharacteristically warm periods have produced big builds in inventory while seasonal cold swings have matched with draws in inventory.

Last Wednesday, stocks started lower even before the EIA data was published. That's because investors had the American Petroleum Institute (API) forewarning of a build on Tuesday evening. That is why this week, given the cold temperatures that persisted during the current period, I took my long position in United States Oil (NYSE: USO) on Tuesday afternoon before the API release. Notably, it was also at the lows for oil prices, and possibly an inflection point, at least until being derailed by the China factor this morning. I would suggest using this weakness as an opportunity for better entry for the bet on an inventory draw driven recovery that I expect over the next few weeks.

This week s API report showed a crude oil inventory draw of 5.6 million barrels, versus expectations for a smaller draw of 2.75 million. The impact to energy securities in after-hours trading was profoundly positive. But not long after the API release, we received news of a successful hydrogen bomb test by North Korea. And probably more importantly to today's early global sell-off, The Peoples Bank of China lowered its daily fixing to the U.S. dollar by 0.22%. It's reminiscent (though not as drastic) of the currency move China initiated in August before equities sold off. This has altered the start for stocks and energy for Wednesday morning.

Sector Security	Early Indication
SPDR S&P 500	-1.5%
SPDR Dow Jones (NYSE: DIA)	-1.6%
PowerShares QQQ (NASDAQ: QQQ)	-1.8%
iShares Russell 2000 (NYSE: IWM)	-1.7%
Vanguard Total Stock Market (NYSE: VTI)	NA
United States Oil	-2.9%
iPath S&P GSCI Crude Oil (NYSE: OIL)	-3.8%
Energy Select Sector SPDR (NYSE: XLE)	-2.4%
SPDR S&P Oil & Gas E&P (NYSE: XOP)	-2.9%
Market Vectors Oil Services (NYSE: OIH)	-2.9%
Financial Select Sector SPDR (NYSE: XLF)	-1.8%

Last evening, before the North Korea and China events, United States Oil was indicating a 0.8% higher open for today on the API oil data; as you can see, it has swung to down 2.9%. Stocks generally would have benefited as has been the trend. Thus, when the EIA Petroleum Status Report is published today, it has the potential to turn energy securities and stocks generally. If not today, look for a trend of draws from inventory to help support and fuel stocks moving forward. Obviously, the impending freedom of Iran to supply to the open market will eventually weigh, but I believe this issue has been adequately accounted for in the price of oil. Rather, it is this inflection point in crude inventory that matters more, and will in my view prove so over time.

This article was written by

Markos Kaminis

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Markos N. Kaminis generated a 23% average annual return on "Strong Buy" stock selections over 5 years while working as a Senior Equity Analyst on Wall Street. As an internal whistle-blower, I sacrificed absolutely everything to do the right thing. And despite being an eyewitness and victim of terrorism on 9-11, I am currently volunteering at a busy border crossing helping Middle Eastern & North African refugees, most displaced by war or other horrors, to land safely in Europe. Despite my life experiences, I still have hope, and believe that we must persevere with patience (forgiveness), tolerance and love. I have determined to struggle for the better good of my brethren rather than for myself, and you'll see that play out over the course of the rest of my life. But I worked far too long and hard to become an excellent stock-picker to not incorporate this work into the fold. Markos N. Kaminis generated a 23% average annual return on "Strong Buy" stock selections over 5 years and ranked 2nd among a group of 60 analysts in-house as a Senior Equity Analyst over a seven-year period at Standard & Poor's. After proving his value in-house, he was promoted into a special role as an idea generator, supporting the portfolios of institutional clients as well as driving performance within S&P's recommended lists and portfolios. At times, Markos was responsible for up to 10% of the firm's entire "Strong Buy" list and is due a great deal of credit for the group's outstanding performance during his tenure. Markos followed a group of 30-40 Small and Mid-Cap firms, and was charged with finding new buy and sell candidates across industry sectors. He generated a 23% average annual return over five years on his "Strong Buy" recommendations, and 26% over three years ended 2004. He was ranked 1st of 60 analysts in-house for his "Strong Buy" performance over 4 years (2nd over 5). 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See: June 15, 2017 – Buy Oil Back Now; August 1, 2017 – Why Oil Prices Will Break Out – The Demand Driver; September 30, 2017 – Why Oil Prices Can Break Out Part II: Vulnerable Supply; and January 26, 2018 – Up 44% Since Our June Bullish Turn – Oil Still Supported Here. While not perfect, over the years, Markos has made countless correct market and security calls for his followers, including forecasting the demise of J.C. Penney on the heralded CEO hire's disruptive plans, the bankruptcies of Washington Mutual and Pilgrim's Pride in the $30 and $20s, respectively, as well as the purchase of Facebook in the mid-$20s when it was considered a pariah post its IPO (today it is a market darling). Markos also warned of the real estate market collapse and the financial crisis in the early days of his blogging. What I personally want you to know about my plans: After witnessing the worst of Wall Street firsthand and having the ideal vision of my childhood career choice corrupted by reality, I almost switched to full-time charity work at age 40 and still have plans for several non-profit endeavors. The future is somewhat unknown, and I am open to employment offers for portfolio management or other ideas. While continuing to publish regularly, I expect to begin work on several book ideas that I believe are important for business, for our nation and for society. I may put my stock selection skills, earned through blood, sweat and tears, to better use, and to make my own way. I would like to give investors something rare, a dignified partner who can manage money with integrity and a clear conscience about the degree of due diligence behind investment decisions... someone who cares more about your money than your wife. I hope readers will become followers of my column here & at my blog, so that when our numbers are substantial, we might start an investment fund or two. Prior to his Wall Street career, Mr. Kaminis spent time in the back-office, as a mutual fund accountant, where he managed for a time the work of two men. Before this, from age 11 to age 25, he worked as a carpenter's apprentice and carpenter with his father, in both commercial and residential projects. Mr. Kaminis has an intimate knowledge of the real estate (undergraduate degree in Real Estate and Finance) and construction market, as well as the restaurant industry. However, as a generalist stock analyst, he showed the ability to learn any and the most complicated of industries in short time - and he gamed every challenge presented to him. Mr. Kaminis earned his MBA at the Katz Graduate School of Business at the University of Pittsburgh, and his BA at Temple University in Philadelphia. However, Markos has been studying the stock market since age 13, when he determined his career path. He made his first investment at age 16, and funded much of his undergraduate education with the proceeds of his investing success. Mr. Kaminis continues to keep busy forecasting the economic path and securities market activity. Markos is considering the eventual start-up a long/short capital appreciation hedge fund. Such a fund would limit risk through beta reduction, using a diversification strategy targeting sector & industry and long & short position inclusion. At the same time, Markos' theoretical fund would seek maximum capital appreciation through the exploitation of Mr. Kaminis' inherent economic & market discernment gift and proven stock selection skills. Mr. Kaminis also has a team of a select few analysts, technicians, strategists and economists that he has been impressed by over the years, which he expects to tap for the project when the time is right. Mr. Kaminis welcomes your interest in such a potential forward effort, and looks forward to discussing his plans with those appropriate and within legal constraints. Markos toys with very early stage entrepreneurial efforts in the testing of certain business models, all of which he intends to tie to a planned non-profit project serving the most helpless among us. The tie will be that the businesses will give employment opportunity to individuals who would otherwise have difficulty finding gainful employment. It will house and heal the homeless, ex-convicts, those completing rehabilitation efforts for drug and other addictions, and others in need of help. Markos is currently Directing the widely syndicated blog he founded, "Wall Street Greek," and is writing for other well-known publications besides advancing several big ideas. Markos' column is syndicated across sites like the Boston Globe, Kiplinger Magazine, UPI and other reputable newspaper and TV websites, as well as private networks, Amazon Kindle, iPhone and more. In the past, he has written for RealMoney.com, Motley Fool and others. Requests to research specific companies are welcome, as we serve our readers. You may contact us via this blog's contact info. Mr. Kaminis welcomes you to follow him here at Seeking Alpha, where he is proud to be a long-time contributor to this strong team of writers. He considers the Seeking Alpha team and management close friends, and for you, people worth knowing and following. Visit his site: Wall Street Greek (http://www.wallstreetgreek.blogspot.com/)

Disclosure: I am/we are long USO, XLE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

2016's First Stock Market Rally Catalyst - Inflection Point For Oil Inventory

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