Friday's Daily Briefing took note of the increasingly tenuous rallies in both stocks and bonds, suggesting that we were nearing the point where one was likely to reverse. And it didn't take long to play out.
Bonds continued to surge on Friday, with yields on both German and Japanese treasuries hitting new all-time lows. This time, the equity markets weren't so sanguine.
Stocks got hit around the world. Various European markets were off two to three percent, on average, and Asian markets also suffered significant selling. US markets were actually relatively strong compared to much of the world, but they weren't completely immune. The Dow (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) were both off about a percent, and the Nasdaq (NASDAQ:QQQ) fell more than that.
Presumably at fault was new polling showing that public sentiment continues to move in favor of Brexit in the United Kingdom. The British pound (NYSEARCA:FXB) fell almost two percent on the day - its worst loss in 2016. British stocks, in dollar terms (NYSEARCA:EWU), fell a sharp 3.6% on the session.
Not surprisingly on a rough day, the US dollar (NYSEARCA:UUP) found a safety bid. The effects of the weak payrolls data now appears to be gone, and the dollar has stabilized despite the odds of a summer rate hike plunging:
Commodities, with the exception of gold, got hit. Oil's (NYSEARCA:USO) stay over $50/barrel was brief. In a turbulent session, it got hit for a more than 3 percent loss to drop back into the $48s. If you're still long oil on speculation, realize that the global sentiment tide may have crested, and that the supply picture remains bleak for long holders. A return to sub-$40 oil is likely.
As for gold, it's making another run at $1,300/oz. It has attracted interest as a safe haven. However, gold and the US dollar usually don't go in the same direction for long. With the US dollar on a strengthening trend that is likely to continue, I don't see the move in gold getting too far.
The S&P 500 appeared set to make new all-time highs. On Wednesday, it ticked over 2,120 and was within 15 points of the record. However, Thursday saw the market merely tread water, and Friday opened lower and then saw steady selling throughout the day.
At this point, the S&P 500 is in serious technical danger of forming yet another failed rally here around the 2,100 level:
If the bulls don't regain traction here soon, a correction is likely to get going. This is a great point to take some profits or engage in hedging, as odds now favor the market going lower. Global economic clouds are darkening, and now bears have finally managed to follow through with a strong selling session that could start to feed on itself.
Reiterating The Call: Avoid Refiners
Oil refiners (NYSEARCA:CRAK) have become an unlikely yield hideout for investors scared by the rest of the energy sector. With some tempting high yields, I can see the cursory appeal.
However, refining is tied to the notoriously volatile and unpredictable crack spread - the difference between the price of raw crude oil and refined products such as gasoline (NYSEARCA:UGA) and heating oil.
Unfortunately for the people who have piled into refiners for the yields, the crack spread continues to worsen. It has hit its lowest level - on a seasonal basis - since 2010, and profit margins have dropped by more than $5/bbl over the past few weeks.
Just look at the difference in the change in crude oil (refiners' input cost) and gasoline (their biggest source of revenue):
As you can see, since March, gasoline has trailed oil by a full 15%. That absolutely crushes refiners' profit margins. Even worse, gasoline can't find a bid even heading into summer driving season. This is just one of the numerous signs that the rally in oil is a sham - there's little sign of increasing demand for refined oil products, even as the price of oil has almost doubled.
That said, for the time being, refiners are setting up for more bad quarterly results; the last two soft quarters aren't an exception, but rather, the new trend. Oil may drop back to the $30s and rescue refiners' profit margins - this probably should happen in an economically rational world, in fact.
However, for the time being, you don't want to be holding stocks like Western Refining (NYSE:WNR). I know the 7% yield looks tempting, but the company simply won't keep paying it if current crack spread trends continue. This sort of chart speaks for itself:
Once $20 drops, from a technical perspective, it could go a lot lower in a hurry.
It seems energy is on a determined mission to remind investors of the dangers of chasing yield. From one energy subsector to another, every hot yield play ends in tears. First it was the leveraged upstream MLPs like Linn Energy (LINEQ) and Breitburn (OTCPK:BBEPQ). Then the pipelines crumbled. Now that people have rotated into refiners, those are the next subsectors to cave in.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
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