Coming Week: No Top for Oil?
Joanna Ossinger
05/10/08 - 10:16 AM EDT
With action on the stock market front slowing down next week, oil's intrepid rise continues to grab investors' attention.
Crude climbed to
around $126 a barrel on Friday, as the fundamental tight supply/strong demand picture remained intact and investors continued to pour into the space.
Buying is coming from both the commercial and investment sides of the market, says Darin Newsom, senior commodities analyst at DTN. "The investment money continues to flow into crude oil on the idea that it is going to go up."
ETFs such as
United States Oil(USO Quote - Cramer on USO - Stock Picks) and
iPath S&P GSCI Crude Oil Total Return Index(OIL Quote - Cramer on OIL - Stock Picks) allow investors to track the commodity with relative ease.
"In this type of environment, there really is no resistance level," he says. "We could have another couple months of this" move higher.
Eric Wittenauer, energy futures analyst at Wachovia Securities, agrees.
"At this point, any correction or pullback in prices eventually leads to a rally that results in record prices," he says. "It's too early to call an end to the trend."
"To the degree that hedge funds or whomever can borrow at close to the fed funds rate, there's incentive to borrow [money] and buy oil, because the funds rate is below the inflation rate," Paul Kasriel, chief economist at Northern Trust, points out.
But notes of caution are being sounded amid the investor party.
"As strong as this [oil] market is, the higher it goes, the more wary to have to be," says Phil Flynn, vice president at Alaron Trading. "Even in the strongest markets you can have wicked corrections. When the market looks like it has a sense of bullish inevitability, the come-lately guys can get hurt really bad."
Flynn also points out that crude prices peaked around Memorial Day last year, and it's possible they could follow the same pattern this year.
Rising oil dented stocks last week, with all three major indices losing ground. The
Dow Jones Industrial Average fell 2.4% over the five sessions to 12,745.88. The
S&P 500 declined 1.8% to 1388.28, and the
Nasdaq Composite shed 1.3% to end the week at 2445.52.
Market observers didn't see much in the way of catalysts in the coming week to move equities much higher.
Todd Leone, head of listed trading at Cowen & Co., said the S&P's failure to rise above its 200-day moving average, a key technical level, may have been discouraging to many.
He's still optimistic, though. "I think the market may trend slowly higher," he says. "Buy the dips, is what I'm thinking."
On the other hand, Jason Goepfert, chief executive at Sundial Capital Research, sees a number of negative signs. He lists unusually low volume, a negative divergence in breadth (meaning not many stocks are confirming the move on the indices) and a high level of optimism as some of the factors causing worry.
"When you combine all those together, I think it paints a fairly negative picture," he says. "On the downside, I would look for about a 50% retracement of the March rally," which would send the S&P 500 down to about 1350.
Still, Goepfert mentions that options expiration occurs at the end of next week, and that usually adds to volatility. Over the past few years, that has typically given stocks an upward boost.
On the economic side, the retail sector has a lot of news coming out next week. The
Census Bureau will be releasing its monthly retail sales data on Tuesday. Also that day, blue-chip behemoth
Wal-Mart(WMT Quote - Cramer on WMT - Stock Picks) reports its earnings.
"I'm looking for weak retail sales, excluding gasoline," Kasriel says. "Maybe the worst is over, but there's a lot more bad news to come in terms of credit issues. Discretionary consumer spending is definitely contracting.
"The second-quarter [gross domestic product] change is going to have a minus sign in front of it," Kasriel continues; this would signal that the U.S. economy has receded.
Other notable retail earnings reports next week include
Macy's(M Quote - Cramer on M - Stock Picks) on Wednesday and
J.C. Penney(JCP Quote - Cramer on JCP - Stock Picks) and
Nordstrom(JWN Quote - Cramer on JWN - Stock Picks) on Thursday.
Non-retail profit reports of note will come from
Sprint Nextel(S Quote - Cramer on S - Stock Picks) on Monday,
Freddie Mac(FRE Quote - Cramer on FRE - Stock Picks) on Wednesday and
Hewlett-Packard(HPQ Quote - Cramer on HPQ - Stock Picks) on Thursday.
Since oil and other commodities appear to be eating into the appetite of the consumer, Wednesday's release of the consumer price index from the
Labor Department should be notable.
Federal Reserve chief
Ben Bernanke is expected to give speeches on Tuesday and Thursday, but those events may have less significance than they often might. To a large degree, the markets feel that the Fed may be in a holding pattern on interest rates, so traders may give the central bank head's words less scrutiny than they often do.
