February Looking Up for Stocks?

February StocksFebruary appears to be setting up to be a month of romance with the stock market after the DOW blasted up 521 points in the first two sessions of the month.

Now, you must be wondering about how the stock market is playing, given the turmoil and volatility we witnessed in January that drove the key stock market indices to below their respective 50-day moving averages (MAs). The only thing that has really changed from the end of January has been the rally in oil prices with the West Texas Intermediate breaking (WTI) $53.00 on Tuesday, prior to giving up some gains on Wednesday morning.

Light Crude Oil Chart

Chart courtesy of www.StockCharts.com

Now, while achieving stability in oil is important for the direction of the stock market, it’s obviously not the only thing to consider. And whether this rally in oil means a near-term bottom is here is still debatable, with pundits standing strongly on both sides.

Oil prices, which had been the main drag on energy stocks and the S&P 500, would need to see a sustained break above $50.00 a barrel to convince me that a bottom is in the works. The spike in oil was likely due to a combination of technically oversold oil and short sellers running to cover. Of course, we are also likely seeing some perceived bargain buying of energy stocks by institutional and retail investors.

Keep an eye on oil to help gage the direction of the stock market. In the trenches, there is heavy buying of call options, especially the June XLE 84.000 call with 58,000 contracts purchased (source: Yahoo! Finance, last accessed February 4, 2015), meaning the bulls are surfacing.

Energy Select Sector Chart

Chart courtesy of www.StockCharts.com

Big-name energy stocks are edging higher on the move, but I’m not convinced oil can hold. I would be sticking with the integrated plays with downstream assets.

On the stock market charts, the buying push on Monday and Tuesday drove the major stock indices back to above their respective 50-day MAs. I was hoping for a bigger adjustment to buy, as the stock market bounced back after correcting a mere four percent.

Now, while I’m not 100% sure what is in store for the stock market going forward, the Stock Trader’s Almanac is cautious and suggests an uneasy year following the negative January. Of course, this wasn’t the case in 2014; after a negative January then, the S&P 500 subsequently closed higher in eight of the next 11 months.

Large Cap Index Chart

Chart courtesy of www.StockCharts.com

A look at the seasonality cycles offers some hope that the stock market is heading higher over the next few months, as long as oil prices don’t retrench back to the mid-$40.00 level. Seasonality suggests the S&P 500 from 2011 to 2014 tended to move higher 100% of the time in February followed by 75% in March and April. That’s pretty good if you are a betting man. In fact, May tends to be the start of the worst six months for stocks, based on historical tendencies. We are seeing active buying in SPY March 2015 call options, implying short-term bullishness. (Source: Yahoo! Finance, last accessed February 4, 2015.)

S&P 500 SPDR Chart

Chart courtesy of www.StockCharts.com

In all, I continue to be positive in 2015, but I also expect the global economic uncertainties to drive continued cautious and volatile trading into the foreseeable future.

I view stock market adjustments of up to 10% as a buying opportunity. So far this year, investors should be looking at stock market weakness as an opportunity and not a signal to run to the exits.