Nothing wrong with a market led by oil provided that it's a general and the rest of the market stands with him. But this crude general has no divisions following him and it is beginning to make people feel very unsure of the future, especially on the eve of what some are saying is the most important Fed meeting in ages. You know what? Let me outline why you can't blame them.
Before I finger oil though, let me just say that in all of the years I have been doing Mad Money I have never seen a reaction to an Off the Charts as I have about last night's history lesson from Larry Williams about the last few days of June. Remember, ideally, the time to sell is Friday or Monday. But let me tell you something, I have never seen people stop me on the street and say should they do something from the show. Except this time. Which means there might be a bit of a cause and effect going, given that if you sell on those days and buy at the first profitable opening anytime in the last 22 years, you made money 100% of the time.
Let me repeat that, 100% of the time!
There are enough traders who watch the show and are worried about the Fed tomorrow that they no doubt are thinking why not get out ahead and profit anyway. The fact that Williams is NOT saying to leave right now is not bothering the sellers.
Now back to leadership. In any market we have groups of stocks that are able to shine, even on down days. Pretty much any leadership is worth following. If it is the banks, that could mean that credit is bountiful, trading is good, loans are solid and net interest income is strong. We have all of those right now except the latter. But the bank stocks are weak again.
We could have the industrials, which demonstrates healthy sales and earnings for gigantic companies that pull their own weight and then some. We don't have them today. Very few are higher.
Healthcare's a terrific leader. Wide ranging with great pin action. Good healthcare movement either from Johnson & Johnson (JNJ) and Lilly (LLY) or other big cap stocks, and UnitedHealth (UNH) could be classic terrific leadership. Nope, nothing.
Or tech. With the biggest cap stocks being tech stocks, they are the ideal leadership. But even though the news flow is good other than a very long article about the hazards of working at Amazon (AMZN) , there's nothing positive happening.
Which brings us to the oils.
Now, a couple of years ago I went out of my way to say, no scream, that the oils had become uninvestible. The stewards of the companies, perhaps goaded on by a very pro-fossil fuel President, did not seem to care at all about what happened to the environment.
Now many have gotten religion. I have continually told you I like Chevron (CVX) and Pioneer (PXD) and I would double down on that call. I also like Exxon (XOM) which, after a shocking victory by insurgents who are far more environmentally oriented than the rest of the board, it's obvious that Exxon has now become investible, too.
So then what's wrong with this leadership?
First, it is so in Jay Powell's face. Even as many commodities have fallen rather precipitously in the last few weeks, oil just keeps going higher. That means tomorrow when Powell gives his statement about interest rates and has his press conference he will be tormented by the press into multiple questions about inflation. He was going to be able to get away with an "I told you so" with where the grains, lumber and copper were going. But oil is just too powerful a negative for the press to ignore and I bet he will say at one point he is monitoring it, giving a reason for traders to turn sellers. They are clearly bent that way and after the Williams work who wouldn't be.
Second, no matter what you say or do, the algorithms that control so much trading will immediately find that oil demand is higher than expected and that's inflationary. I have said over and over again that the price of oil is going up because of a reduction in supply from newfound discipline and environmental issues. The win by unknown Exxon insurgents has created a panic in the oil patch. The only really sure way to cut down on emissions is to cut down on drilling. Is there any real wonder why Shell (RDS.A) (RDS.B) is considering selling its entire 260,000 acre Permian position - one of the most fecund positions in the U.S. for $10 billion? Who wants to drill here?
The oil companies are now almost all being run for cash and are no longer taking on debt to expand. Drilling rigs are not increasing despite the increase in price, highly unusual.
Neither the environment nor the lack of drilling "counts" to the traders so it won't count to the press tomorrow when they heckle and hector the Fed Chief.
Third, the President has made his choice when it was clear he wasn't going to approve the Keystone pipeline. I think that's the signal that unless it's been approved you can rule out most of the pipeline projects on the drawing board and that makes it so you have tremendous scarcity and no more reason to find a lot more oil. No wonder one of the hottest groups since the year began is the pipeline sector. Why not? They've been crushed by cutthroat competition. Now to the incumbents go the spoils.
Add it all up and you have a business that is a tax on the system, that doesn't do nearly the hiring that it used, that has no soldiers following its generalship, and that could force the Fed to change its tune to a harder line.
Can Powell avoid an oil trap? The Fed has almost always viewed a surge in crude oil as a transitory event and judging by how prices move that's been a correct judgment. It's been my view all along that when Jay Powell said inflation was going to run hotter than expected it included crude. My only problem with crude this time around, though, is that almost all of the reasons why crude is going higher are not cyclical. They are mandated or arrived at by a rare bout of commonsense by the oil companies coupled with the shocking proxy fight at Exxon where a group of no-names battled Goliath and won. Only help from the Saudis or the Russians is going to change things and I don't see either doing us any favors.
So let me give you the bottom line: tomorrow when the Fed gives its statement I do not expect much change in the language. But the stock market is saying that oil's leadership is so obvious that oil must be headed higher and it's so easy, even as retail sales may be easing, even as bond yields haven't gone higher, to point to oil as the quintessential reason why the Fed must change course. Left out is the cause and non-effect. If Powell switches his bias oil won't drop and a cycle will have begun for nothing.