FRI. MAY 6- Commodities Panic

The three most common comments I heard yesterday in no particular:
a) “Wow, oil is down how much?”
b) “What exactly changed between today and yesterday?”
c) Shouldn’t the stock market be up today if commodities prices are falling?”

I touched on all of these issues in yesterday’s blog (which was silver-focused) as well as discussed it all during the morning call. But clearly there was a lot of confusion so let me try to give my interpretation in a bit more detail in this space. For the first one, yes, oil was down going on $11/barrel yesterday with silver down $3.50 and gold off around $50 at one point. Those numbers are stunningly shocking for anyone who follows commodities even at a rudimentary level. Volume on the futures contracts for silver and oil smashed record levels yesterday. Indeed, the SLV instrument which tracks silver prices traded 16,000,000 shares or so on March 29. Yesterday, it traded over 18 times that amount! So what exactly changed? Nothing but for one major thing. Margin requirements were raised particularly in the silver market. Thus as silver began to precipitously decline, other entities (particularly commodities funds) began selling other commodities to make up for their losses in silver. This led to the widespread selling in instruments such as gold and oil. Fund managers were trapped. If, say, I wanted to take some money out of a fund in seeking a redemption, they’d have to raise it. The only way to do so as people raced out of commodities was to sell’ other stuff.’ This goes into question three. The selling pressure extended into equities as well as asset managers had to sell non-commodities assets to shore up books and maintain performance. As long as demand is not caving in on oil, yesterday’s decline did not signal a recession bur rather a market-induced panic due to too many humans and computers being in on the same side of a trade. Thus, in the immediate-run, this process may not end quickly as all of the forced hands out must be liquidated so expect some volatility today particularly ahead of the weekend.

Markets in Asia were down overnight with Tokyo down 1.5% and Hong Kong about 0.5%. The trend has shifted in Europe with markets up 0.5% to as much as 1% specifically in London. Gold is flat after trading lower. Oil is only down $1 after being down $3. The dollar is stronger across the board. The trigger for all of this was the 8:30AM jobs report which brought much stronger data than expected. Payrolls came in much stronger than expected. For today, the broader tape should hope up. Even with commodities down early, the futures have been up from the get-go today and with the commodities off of their lows, it gives equities even more of an impetus for stocks to go higher. The focus will likely be on the earnings plays, relative weakness plays, Chinese ADR’s off of YOKU, and commodities plays.

If the whole story is not there -

If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.


If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-


Good- The following stocks have good news and/or a strong technical pattern

RAH- closed near a high on rumors of a higher takeover bid

ELON- decent earnings

PCLN- good earnings

HANS- good earnings

FLR- decent earnings

KFT- decent earnings

CF- good earnings

CQB- decent earnings

NVTL- good earnings

IMMR- decent earnings

SAPE- decent earnings

RBCN- decent earnings

WCG- decent earnings

WCG- decent earnings

ZEUS- decent earnings


Bad-The following stocks have bad news and/or a weak technical pattern

ACOR- closed near a low after posting bad earnings

VMC- closed near a low after posting bad earnings

ARO- closed near a low after posting bad earnings

SVNT- closed near a low after posting bad earnings and amid worries over the company’s gout drug

JOYG- closed near a low

UDRL- closed near a low after posting bad earnings

SCEI- closed near a low amid rumors about the company’s health

AIG- poor earnings

V- poor earnings

QLGC- poor earnings

BRE- share offering

CNQ- poor earnings

DLB- poor earnings

MDRX- poor earnings

YOKU- poor earnings and announced share offering

NILE- poor earnings

SLXP- poor earnings

SPRD- poor earnings

SUN- poor earnings

WRC- poor earnings

GSIT- poor earnings

SMTX- poor earnings

GMCR- 8.1 million share offering at 71

ALU- poor earnings

AVNW- poor earnings

OMPI- bad earnings

OCZ- closed near a low


Earnings:

FRI MAY 6 BEFORE

ALU BPL CCJ

DSX LNG MSG

SRZ UPL WCG

WTW XEC

FRI MAY 6 AFTER

BRK/A MDVN

Epiphany Trading, LLC
www.epiphanytrading.com

Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President