It has been a long week with some sharp moves followed by sideways trade action. There has been little in the way of fundamental developments, as the markets seems to be trading more on technical levels with just a smattering of data and news to either continue momentum or slow it considerably.
For example, in the S and P, the technicians were looking to press it lower using the hangover from Greece and China as an excuse to press the price discovery lower. It seemed to be effective trading below 2100 several times, before some earnings data or some other positive economic development (yesterday's initial claims report) would emerge to bolster the market.
In some cases, like natural gas, we are seeing the technical developments outweigh what should be strong fundamentals, as the market has inexplicably made a move lower yesterday and in the overnight session. We have been looking for some indication of supplies dwindling so that the price discovery could make its move higher with demand remaining strong. Yesterday, the inventory report showed only 61 BCF build versus the expected 70 to 75 BCF. The market traded higher, initially hitting 2.95 before failing and trading as low as 2.81 during the day session. That slide has continued, with the market trading in the high 2.70's now, despite the less than expected build.
Crude seems to have found its support level in the high 40's, though there has been little bounce off of the lows yesterday, with crude still trading below 49 dollars. Wednesday did feature a surprise build in inventories, the first in five weeks, though it was not egregiously off expectations. The ‘herd mentality’ that sometimes inundates the crude price discovery seems to be adding to the recent sell offs, as well as the general commodity weakness (see gold, natural gas, copper) that would appear to have to do mostly with the slowing in China.
With some major market players (Bridgewater, JP Morgan (NYSE:JPM), etc) turning bearish on China recently, it is reasonable to see some pressure on the commodity sector. However, as we have touched on many times over the past several years, the 'easy money' era of the central banks seems to always make these stories, like we are seeing with China slowing, things of the past rather quickly. Either the data turns more solid (China's better than expected GDP last week), or the central banks inject money supply to encourage bullish activity. Obviously, it is hard to imagine this methodology continuing into perpetuity, but for the time being, this is what we have to consider on most dips in markets that should rally based on higher demand/positive economic data.
Disclaimer: Trading commodity futures and options involves substantial risk of loss and may not be suitable for all investors.