It was an interesting day for the markets that started weak form Risk off (investors not buying high risk assets) then quickly turned RISK ON (buying higher risk assets) after the Crude Oil Inventory number was released.
The number was a huge build of 8.383M over the forecasted of 3.277M but Oil immediately rallied. The bad news was expected and oil traders took oil on a nice run to $32.84.
The S&P 500 has been strongly correlated to the oil market and rallied also. However, the mood changed quickly after the 2PM FOMC rate announcement. Rates were left unchanged but Yellen’s dovish comments spooked the markets and the STRONG RISK OFF selloff began with some substantial volume.
The close of 1882 for the S&P 500 held the 1870 line in the sand for this rally off the bottom we are currently experiencing but it is starting to look precarious. If you are long the market you should have stops in place.
The thesis for the short term bounce to continue is still in play as supported by the relationships between Oil, the US dollar, bonds and the current levels of the S&P 500.
Here is how this shakes out. US dollar weakening back to a more “normal” level vs the S&P. This would be supportive to commodities priced in US dollars like WTI Crude oil. A bump in crude prices and weakening US dollar gives the markets a bump. Bonds (TLT) pulling back from an expensive level versus the S&P coupled with the other connections and the S&P has some room to continue higher. I’m not expecting big things here, this is short term bounce to bring these relationships back into alignment. Longer term the problems still remain that have gotten us to this point.
We’ll see what tomorrow brings.
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