Market Focus Fixed on Commodity Cycle

Investors are growing increasingly distracted with year-end loose ends and the holiday season — so last week was a bit lackluster.

The U.S. economy still looks to be the world’s bright spot. Friday’s strong jobs report rekindled hope for better-than-stall-speed U.S. growth. Meanwhile, Japan’s economy is still contracting sharply, China is slowing and the euro zone looks set to plunge into recession if the European Central Bank doesn’t act soon.

The crashing oil market continues to dominate headlines, and everyone is still trying to figure out whether the rout is short- or long-term, and what its impact will be on the world’s oil-dependent economies.

Obviously, net exporters who derive a large share of their GDP from oil — like Russia — will suffer greatly. Meanwhile, net-import countries will enjoy the price break to varying degrees. And although the U.S. is a net importer, most calculations show only a minor increase in U.S. GDP attributable to decreased global energy prices — particularly now that U.S. oil production has grown so dramatically in the last decade.

Now, let’s take a closer look at these trends as we go around the market in 10 seconds…

• Global stock markets were mixed last week. Chinese stocks (FXI) rose a sharp 3.4%, while emerging-market shares (EEM) dropped 1.5%. U.S. stocks were mildly higher but, interestingly, led by a 0.9% gain in small-cap stocks (IWM).

The outperformance of small-cap stocks is noteworthy, because they have materially lagged all year. It’s too early to make judgments, but I’m watching closely the small-to-large cap ratio (IWM: DIA) and will be on guard for a bullish turnrnaround.

• Bond markets fell across the board last week as the strong jobs report painted a robust outlook for U.S. economic growth, causing interest rates to climb higher. We’ve probably seen a near-term low in interest rates after the 10-year has now bounced higher off of 2.2% on two occasions.

• Commodity markets were mostly down. Energy markets suffered through continued negative pressure last week and have yet to find any meaningful support (read: buyers). Any contrarian who tried to buy oil’s perceived steep discount in recent weeks is only sitting on steep losses. Positive seasonality for oil typically doesn’t show up until January, so it’s still best to side-step any oil exposure as this shakeout continues.

Looking Ahead…

Spiraling oil prices will continue to draw the market’s focus this week. And while the slide can certainly be viewed as a warnrning sign of weak global demand, the strong jobs report last week suggests U.S. growth, at least, is robust enough to avoid recession for the next several quarters.

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Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.