Negative Oil Prices, $3,000 Target on Gold, and the 104-Week Moving Average for the S&P

There have been a number of things I have said and seen in the last few months that I would have never thought would happen in my lifetime—worrying about a toilet paper shortage in the U.S., markers on the floors of stores to measure where to stand, etc. The latest on the list is negative prices in oil futures.

At the close on Monday, when the April contracts expired, the price for those contracts was -$37.63. This phenomenon resulted in me having to explain to friends on Facebook how the futures contracts work. The owners of the April contracts could choose to take physical delivery of the oil the contracts entitled them to, but the delivery of the physical oil would have to take place in the month of May. This presents a major problem because almost all of the world’s storage facilities for oil are full. With storage capabilities in high demand, storing the oil would cost more than the oil itself.

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Did you ever dream there would be a scenario where oil futures prices would reach negative prices? I would have never dreamed such a scenario would occur. I was so dumbfounded by what played out on Monday afternoon that I was discussing it with my 15-year old son. Consider it part of his home-schooling curriculum for this week, but I was explaining how the futures contracts work and why someone couldn’t just get paid to take delivery of oil.

President Trump announced that he would like to take this time to add to the strategic reserves of the U.S., but even the government’s storage capacity is limited at this time. I agree that now would be an opportune time to add to the reserves, but how many barrels of storage capacity do we have at this time?

“The Fed Can’t Print Gold”

Something else happened on Tuesday morning that got my attention. Bank of America issued a report titled “The Fed Can’t Print Gold” on Tuesday morning and the investment bank raised its 18-month price target for gold to $3,000 per ounce. That is a 50% increase over BOA’s previous target of $2,000 and 75% above the closing price on Monday. The all-time high for gold is $1,923.70 an ounce and that came in 2011.

The argument laid out in the report specifically pointed to contracting economic output, a surge in fiscal outlays, and central banks doubling their balance sheets. This could lead to pressure on various currencies and according to the report, “Investors will aim for gold.”

I don’t recall ever seeing an investment banking team raise their forecasts for gold by so much. Sure they make forecasts all the time and it isn’t unusual to see forecasts for stocks that call for a jump of 50% or more, but I have never seen such a bold forecast for gold. That type of forecast is usually reserved for gold newsletters that seem to always be bullish on gold.

The S&P and Its 104-Week Moving Average

I have pointed out a couple of potential resistance points that the S&P could face in the coming weeks and months as the index has rallied sharply from the March low. One that I pointed out was the 104-week moving average. This particular moving average has caused me to catch grief from others in the past because it is unorthodox. Most investors use round number moving averages, but I prefer to use time-oriented moving averages that make sense based on the calendar and 104 weeks is two years of data.

Regardless of why I use it, the S&P closed right on its 104-week moving average this past Friday. The index has traded lower the last couple of days and barring a big reversal it looks like this week could bring the two-week winning streak to a halt.

Another development I am watching for on the weekly chart is whether or not the 13-week (one quarter) moving average crosses below the 104-week. During the huge drop in 2018, the 13-week never made the bearish crossover. The last time the two were inverted was at the beginning of 2016 when the market did a double dip in the second half of 2015 and the beginning of 2016. Prior to that crossover, it was all the way back in February 2008 that we saw the 13-week below the 104-week.

What this means to me is that if we see the two moving averages cross and the 13-week remains below the 104-week, investors will want to continue exercising caution on long-term investments.

Almost all of us are dealing with something that we have never dealt with before and it is taking a toll on us emotionally and mentally. Hopefully, we are able to restart the economy soon and hopefully, we will stop seeing and saying things that we never thought we would see. The best advice I can give regarding the market is to remain cautious, use things like the moving averages of the S&P to help you make decisions. Things like these will help take the emotion out of the equation.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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