The Market Is Starting To Feel The Pressure of High Oil Prices

While the market ($SPX, $SPY) closed at the highest level since the last week of May 2008, there is some internal pressure building from high oil prices that might cause the overall market to pull back. The market has continued its ascent, but one major sector that has not and has actually taken a beating over the past two weeks is the Transports ($IYT, $DJT).

The market can ignore the effect of rising oil and gas prices for only so long. I remember last year around the same price levels, equities topped. Eerily, we are at the same levels for both markets (oil/gas and equity). Will we repeat the same thing we saw last year? Will the market top at these levels because of demand-destruction caused by rising oil/gas prices? While I do think oil/gas prices will come back down in a few months, one must remember it is very hard to forecast these things-especially with many black swan events waiting to trigger which could cause oil prices to go both ways (Iran conflict, Euro crisis, China hard landing,etc).

But one thing to keep an eye out for in the short term to gauge some type of feel for the market is the Transports sector. If they can’t rebound soon or at least hold these levels, then the market should follow suit.

$IYT – iShares Dow Jones Transportation Average 

As you can see, the Transports (or “Trannys”) closed below its 50 day moving average for the week. While there have been head-fakes over the past few months with the IYT closing below the 50day, this time it feels different. What’s so different? Check out the volume. There is some huge selling going on. The same thing cannot be said during the head-fakes back in November and December. Also, as you can see, the Transports broke an ascending (rising) wedge pattern. A measured move puts the IYT somewhere around $82.50

If the Transports head towards the next logical support area (the 200 day SMA), the overall market might start to take notice and start pulling back with it.

(Daily Chart)

















Tags: $DJT, $IYT, $SPX, $DJIA

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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