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Crude oil is cutting through stocks like a hot knife through butter, as re-ordering resumes in risk markets

By Peter Kenny of KennysCommentary.com

That incremental decoupling of equities from crude, which I mentioned in yesterday's morning's note, fell flat on its face yesterday after crude fell an additional 5.5% -- on top of Monday's 6% drop. However, keep in mind that this week, crude has dropped nearly 11% while equities have moved only 2% lower. The "decoupling" thesis had held up well up over the past three weeks, but with Tuesday's additional sharp trade lower, equities simply fell out of bed -- in a rather inglorious fashion. The energy, industrials, financials, technology and communications sectors all lost about 2% or more on the session. In fact, the best performing sector on the day was materials. Basically, it was a rout.

Source: Yahoo Financial, TradeStation
Source: Yahoo Financial, TradeStation

The Dow Industrials slid 294 points or 1.79% while the S&P 500 dropped 1.87% and the NASDAQ moved 2.24% lower. Volume rose on the NYSE (+5.31%) and NASDAQ (12.58%) as well. Internals were solidly negative on both the NYSE and NASDAQ, not surprisingly.

Source: Yahoo Financial, TradeSatation
Source: Yahoo Financial, TradeSatation

The economic data released yesterday began with solid Motor Vehicle Sales of 17.6M - slightly above expectations of 17.5M. Redbook, store sales year-over-year change of 0.8% versus expectations of 1% was an inconsequential miss. Otherwise, the calendar was light.

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Today's calendar includes ADP, PMI Services, ISM Non-Mfg. and the weekly EIA Petroleum Status Report. ADP will rule the roost in the early going, with +190k as consensus. Another factor likely to dominate the day's trade is the EIA Petroleum Status report. A significant drawdown of inventories, as measured by the EIA report, from crude to gasoline and distillates would help stall a more dramatic selloff in crude and, as a result, help stablize equity prices. If that does not materialize, we could be in for yet another gut check.

Clearly yesterday's price action reminds all of us that the themes that have been behind a cautious/worrisome outlook and a dreadful year-to-date performance for equities remain topical.

Source: Yahoo Financial, TradeStation
Source: Yahoo Financial, TradeStation

As dreadful as the price action was yesterday, we did manage a close above the intraday lows and above support. On January 20th, the S&P 500 closed at 1859. Yesterday's close was at 1903.03. If we continue to see sellers run the shop today, keep an eye on the January 20th close, which is 2.3% below yesterday's close. My sense is that we should see some support, baring a complete collapse in crude pricing. A great deal will depend on today's EIA report.