Here’s What’s at Stake for Stocks as Russia, Saudi Arabia and Iran Talk Oil

Here’s What’s at Stake for Stocks as Russia, Saudi Arabia and Iran Talk Oil


A massive short-covering squeeze has moved the Dow Jones Industrial Average ever closer to massive overhead resistance near the 18,000 level — a threshold that hasn't been crossed since last July and first crossed back on Dec. 23, 2014. The bulls are threatening an upside breakout that would end a three-year funk for U.S. equities.

Below the headline flashiness, evidence of vulnerability remains: Narrowing market breadth, fundamental challenges and overheated hopes of an OPEC-Russia deal to cut crude oil supplies. There is also a wide gap in expectations for Federal Reserve rate hikes: The futures market expects a "one-and-done" scenario after December’s quarter-point increase while policymakers and economists expect a move in June followed potentially by another later this year.

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Investors have happily looked past all this thanks to a number of positive catalysts. Financial stocks, which have been looking so vulnerable lately on net interest margin and M&A slowdown fears, have led the way, with Citigroup beating expectations despite a 27 percent slide in first-quarter profits. JPMorgan Chase on Wednesday also beat lowered expectations. Its shares gained on better trading revenue, tight expense management and solid loan growth. Investors were also comfortable with an increase in loan loss provisions driven by energy sector defaults. Concerns surrounding rates, market volatility, growth and commodity headwinds all seemed to melt away.

Even forlorn momentum favorites have been on the move, possible evidence of rekindled animal spirits.

Wearables maker FitBit (FIT) has shot up 15 percent after Citigroup analysts reiterated a buy rating on prospects for new product sales and improved app rankings. GoPro (GPRO) gained 19 percent after the company announced Daniel Coster, who has been a member of Apple's industrial design team for 20 years, as VP of design.

Some good things are happening overseas, too. Chinese exports jumped 11.5 percent over last year in March following a 25.4 percent drop in February. This was well ahead of the 10 percent gain expected. However, this was artificially boosted by calendar effects (the Lunar New Year was late last year) with economists noting few signs of a sizeable pickup in external demand. No matter. The headlines were superficially positive, which is all that matters.

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On the economic front, March retail sales disappointed to the downside, falling 0.3 percent on a monthly basis vs. the expectation for a 0.1 percent gain. Auto sales fell 2.1 percent. And consumer confidence fell to a seven-month low. Oddly, the Atlanta Fed raised its GDPNow estimate slightly from 0.1 percent to 0.3 percent thanks to upward revisions to the January and February retail sales numbers.

Also, producer price inflation posted a surprise drop of 0.1 percent on a monthly basis in March vs. the 0.3 percent rise expected. On the surface, this seems to justify the Federal Reserve's wait-and-see rate hike approach. And stocks liked the idea of inflation weakening, adding to the sense that further rate hikes will wait until later this year.

Also, industrial production fell 0.6 percent in March, worse than expected. And oil dropped on a big inventory gain. Also weighing on sentiment were reports in Reuters that Russia's oil minister said that any OPEC-Russia supply freeze agreement would be loosely worded and involve few detailed commitments.

In other words, policymakers have merely used the threat of action to get the market response they wanted.

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The rally out of the Feb. 11 low has been predicated on this oil freeze agreement. And it has unleashed an epic, historic, unbroken surge that looked to be petering out over the last two weeks. But the bank earnings and economic data unleashed a wave of panic buying that that could still result in a break to fresh record highs.

Is now the time?

Remember, the Fed's data dependency (they claim it's about inflation and jobs) is really about where stocks are. And with equities recovering to pre-December rate hike levels, the coast is clear for a hike at the June meeting that will be teased at the upcoming April meeting. Perhaps this is why the Fed's Board of Governors held an emergency meeting on Wednesday to discuss financial markets.

The market isn't looking for action until December. So that'll be a negative. Especially if Thursday's consumer price inflation numbers are strong.

Despite the banks largely beating lowered expectations, corporate earnings are still on the decline. JP Morgan's revenue dropped 3.7 percent from last year. Earnings per share dropped nearly 7 percent. Citi’s revenue plunged 11 percent. Is this something to celebrate? And if the economy and jobs keep recovering, and the Fed is forced to hike rates further, the pressure on net interest margins and M&A activity will only get worse.

Sure, less bad is good. But it isn't great.

The "OMG, oil production freeze" headline dynamic will play itself out this weekend in Doha, Qatar, as Russia, Saudi Arabia and Iran will need to put up or shut up. That puts us on the other side of April options expiration, at which point the headlines will be dominated by the ongoing rollout of Q1 earnings (set to be the worst since 2009) and the Fed's statement on April 27.

My advice: Tread cautiously as this seven-year bull market has grown old and feeble.