US stocks continued their biggest rally since August, as Tuesday's rally in Chinese equities turned into a Wednesday selloff. Meanwhile, crude oil rallied on news that Russia and Saudi Arabia had struck a deal to freeze production, then retreated on speculation the deal won't do much, then rallied again. So why exactly are stocks rallying?
By Vikram Rangala
Wednesday, February 17, 2016
US and European stock markets rallied again Wednesday, ignoring the earlier drop in Asian equities. The rally pushed the S&P 500 Index to its longest winning streak so far in 2016. Since three days is the minimum number required for a “streak,” by definition, this points to the volatility in stocks so far this year as markets look for solid ground.
Analysts pointed to yesterday’s rally in Chinese stocks as a trigger for the rallies in the US markets. However, on Wednesday Asian equities fell off while US stocks continued upwards. Many in the media declared that the same investors who were using China on Tuesday as a reason to buy were now “looking past” (Bloomberg) Wednesday’s losses in China to focus on crude oil.
Crude oil has also been both scapegoat and justification for the stock rally over the last couple of days. Over the weekend, Saudi Arabia and Russia, the two largest oil producers other than the US, agreed to freeze production levels and urge other producers to join them. The freeze was not a cut, however, and in the current vastly oversupplied oil market, was not expected to have more than a symbolic impact. Oil prices rallied on the news and then fell off.
That rally and drop was not unusual in an oil market that has tried and failed to come off of multi-year lows. The drop came amid speculation that other OPEC members would not join the freeze, especially Iran, which is now freed from sanctions following its nuclear deal with the US. However, Iran surprised everyone by expressing support for the Russia-Saudi-led freeze. Sort of.
Iranian Oil Minister Bijan Zanganeh met counterparts from Venezuela, Iraq and Qatar in Tehran on Wednesday to discuss the production freeze and expressed Iran’s support for the general idea of a “production ceiling” as a way to stabilize the oil market. However, he never explicitly said that Iran would keep its own output at January’s levels instead of increasing it.
In the end, this first agreement between OPEC and non-OPEC producers is more of a proposal. Neither Russia nor Saudi Arabia are bound by it for any length of time. And a freeze is not a cut in production. While oil was up 7% on Wednesday, nothing in any of these discussions suggests that oil supplies are going to be tightened, especially with winter in the northern hemisphere coming to an end.
The rally is most likely bargain hunting by some oil speculators. The most obvious reason to suspect this is the lack of volume behind the buying. Many oil traders are on the sidelines.
So in the last three days of stock rallies, we’ve heard that stocks rallied because of China and in spite of China, because of the oil market’s movement and with no regard for oil. In the end, no single factor can be called the reason for this rally.
While a 3-day stock market rally is not earth-shaking news, it is rare for all three days to have gains over 1%. This means that every time the market broke upwards, it brought in new buyers. Markets move from one region of balance between buyers and sellers to the next. If stocks rally, but the volume is thin, the rally will fade and new sellers will come in to push prices back down. Those who were caught long will sell to exit their positions, adding to the downward pressure.
For markets to rally, traders on the sidelines need to be attracted in. Only a significant volume of buyers can overwhelm the sellers looking to fade the rally. This is how markets move and it really has nothing to do with commentary about China or OPEC. It’s about buying at one price expecting to sell at a higher one. After two months of portfolio rebalancing, it makes sense that investors are ready to shop for bargains.
So in the end, the market is rallying because investors find value in stocks at this price, possibly because of what’s going on in China, OPEC, Europe, or the Fed—or possibly in spite of them. It was the former on Tuesday, the latter today. Investors who watch day-to-day market fluctuations, but only trade long-term movements might do well to trade a limited risk short-term product like Nadex binary options, which allow you to focus on what the stock market is doing right now.
Focusing on the short term is a different experience than guessing how the stock market might respond to Iran’s response to what Russia and Saudi Arabia are possibly, but probably not going to do about oil production. Whew. No wonder a three-day rally is such big news. Three straight days of anything amid so many variables is remarkable.
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