Yesterday was one of the more volatile days that we have seen in sometime across a wide spectrum of markets. The Greek scenario continues to capture the most headlines as negotiations are constant and ever-changing. The real issue though may be one that should garner more attention. That is the lagging Chinese equity market. Yesterday another massive hit to their indices caused trading in many stocks to be halted for fear of an actual panic driven crash.
Whether real or orchestrated, this certainly has given some cause for concern to US equity markets. While there are obvious legitimate concerns economically, they don’t seem to warrant this type of movement up and down movement in US markets, making one look toward the algorithms and a lack of mid level trader liquidity as a culprit in the massive swings that we are starting to see. It seems like a good time to make certain risks are quantified through long options or stop loss tools as these markets are not only unforgiving but also multi directional in the same session.
Crude oil's wild ride Tuesday is a great example of this manifestation. With a nearly 4 dollar range that went from high to low and back to high again, one can only assume that there are significant players looking to the demand factors as they attempt to press the market farther than it probably should go under the circumstances. This rubber band effect usually produces a strong correction that can actually eclipse the initial move particularly when the price discovery is based more on rumor and innuendo than facts. The low of 50.58 Tuesday was followed by a rally to the mid 53 dollar handle shortly after the close of the energy markets. Inventories for both API and EIA were relative non events; though ever so slightly bearish in their tone.
We are seeing some corrective selling based on the weak commodity sector as a whole with WTI trading today into the 51 dollar handle. However, should we see any progress in a Greek deal that produces a turnaround in equities, expect crude to follow suit in an aggressive manner. Unfortunately, the actual fundamentals like Iran dealings or supply readings have very little to do with this price discovery. Demand fundamentals do to some extent, but it’s really more confidence (or lack thereof) in markets currently driving the price action.
Natural gas suffered some through Tuesday’s action, but really has not been affected much as nat gas tends to march to its own beat more than any other commodity. So while it did lag a bit Tuesday, before coming back modestly yesterday, the moves were more natural and less expansive, lending credence to the idea that once the smoke clears, NG will most likely adhere rather quickly back to its fundamental movement, which would seem to indicate a readiness for a rally out of the recent tight range.
Though US issues are always of concern, we are reacting to other problems globally. Therefore, these commodities appear fairly priced when considering the actual US fundamentals.
Disclosure: Trading commodity futures and options involves substantial risk of loss and may not be suitable for all investors.