Perspective: Wall Street Fear Returns

Friday, January 15, 2016

January 15 – The Dow Jones Industrial Average is down more than 400 points at this writing, although 100 points off its session low. A three-day holiday weekend looms before us in which the global markets will continue to trade, raising the risk factors for those holding positions in the U.S. markets. As such, they face the final hour of trade with some sense of nervousness, while of course wondering where the markets will find firm footing.

I outlined many of the reasons for the sell-off in this morning’s Perspective commentary. Added fodder for the bears came from data released during this morning’s trading session. Retail sales for December were down 0.1% from the previous month, below expectations of flat sales and down from 0.4% growth the previous month. Sales minus autos and gas were flat, but that was down from Wall Street expectations of 0.3% growth. Furthermore, factory activity in the New York Fed region contracted dramatically, while industrial production nationally fell 0.4%. Consumer sentiment rose to 93.3 from an index of 92.6 the previous month.

The bottom line is that the Dow Jones Industrial Average is testing the bottom of a channel that has held this market since early 2009 as we were beginning to come out of the Great Recession. That was when the grain and oilseed markets began to recover as well. The grains were higher today, in the midst of the broader market sell-off. Does that mean that were will begin to see the Ags gain relative to the other markets? They traded with the broader markets then, but can they trade opposite of them now?

That possibility needs to be respected, although I remain skeptical without help from a major weather threat and/or weaker dollar. The VIX, Wall Street’s fear index, briefly topped 30 today, before reversing off its high. Historically, it’s very difficult for any asset to sustain a rally when the VIX is above 30 unless that asset has a compelling story. Its reversal lower off its session high is encouraging, but the grains still face a strong dollar that makes them less competitive on the global market amid ample supplies.

I remain bearish the grain and oilseed markets absent a weather threat/weaker dollar. Even so, speculative hedge fund managers hold very large short positions in the Ag markets. Technical movement of money can move prices to levels that make fund managers nervous holding the large short positions. For March corn, I’m watching the $3.65 area, which is an area of resistance on the charts that also coincides with trend line resistance off last summer’s high. Ultimately though, the markets need to see increased production risk to push the grains higher against the tide of bearish sentiment over-hanging the broader markets.



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