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TSP Talk – Stocks, Oil, and the Dollar

Stocks bounced around during last week’s holiday shortened week, and ended up with just a small gain in the S&P 500. The weakness in the dollar has helped the indices, particularly the international stocks, but unfortunately it has also helped the price of oil.

For the TSP, the C-fund gained 0.37% last week, the S-fund was off 0.05%, the I-fund was up 1.70%, while the F-fund (bonds) added 0.21% and the G-fund was up 0.03%.

For the month, the C-fund is now up 4.29%, the S-fund has gained 5.18%,the I-fund has picked up 6.00%, while the F-fund is down 0.18%, and the G-fund has added 0.10%.

The S&P 500 flirted with the 2011 high all week, but could not quite make a move above that 1370 area. The rising trading channel remains intact and incredibly, this tight range has held since before Christmas week.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

This past week we have been talking about whether the sharply rising price of oil will hold the S&P 500 back from breaking out above the 2011 highs. The correlation between stocks and the price of oil is interesting in that the two do tend to move in unison, but at some point the the price of oil affects the the price of gasoline enough to have an impact on consumer spending.

Once oil hits $100, and more so over $105, we seem to get to the point where it is headline news and consumers start to cut back on driving, and spending. When we cut down on driving, the demand for oil decreases, and in the past we would see the price of oil ease again. The problem this time is that oil is rising while the demand for oil is already down to levels not seen since 1997.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

What about the supply side? Despite some aggressive restrictions on drilling from the current administration, which has cut down on oil production on federal land, total production in the U.S. has not gone down because drilling on state and privately owned land has increased. So if demand is down and supply is not down, why are prices rising so sharply?

A lot of oil we produce is not staying in the U.S. since global demand has increased dramatically in the last several years. If the oil companies can sell it elsewhere for more, they probably will, and in fact that is what is happening.

Then there’s the excuse that speculators are driving up the price. Perhaps, but as a trade myself I know that every time something is bought in an open market, someone else is selling. If someone wants to pay more for something than it is worth, they are taking a risk, and prices tend to eventually gravitate toward fair value. That means speculation is temporary.

Understanding all of these possibilities is above my pay grade, but one thing I do know. When the value of the dollar goes down, the price of anything traded in dollars tends to go up. And if you have been watching what the dollar has done in 2012, it isn’t hard to understand why oil, and the price of many commodities, are going higher. It is down about 5% from the early January high.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

If the dollar finds some support at the 200-day EMA we should see the price of oil stabilize and possibly pull back. Unfortunately, that probably means the price of stocks will also ease, but after going nearly straight up for 2 months, maybe a short-term pullback is not such a bad thing.

Good luck, and thanks for reading. We will be back here next week with another TSP Wrap Up.

Tom Crowley
Weekly Wrap-Ups Archive
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