Major Moves 

Crude oil is stuck in the middle of a geopolitical supply-and-demand tug-of-war that is pulling it in two opposing directions.

On one side, you have supply concerns – like the United States’ sanctions on Iranian oil, slowdowns in U.S. shale production and contaminated Russian oil – that are trying to pull the price of crude oil higher.

On the other side, you have demand concerns – like a potential slowdown in the global economy thanks to the trade war between the United States and China – that are trying to push the price of crude oil lower.

Right now, the demand concerns are winning. Crude oil broke below $60 per barrel today for the first time since March 29th and closed at $57.74 as trade tensions increased.

This was terrible news for independent oil and gas companies like Hess Corporation (HES), Devon Energy Corporation (DVN) and Noble Energy, Inc. (NBL) – which dropped 7.93%, 7.30% and 6.93%, respectively, today. The lower crude oil prices go, the less money these companies make for every barrel of oil they pull out of the ground.

If trade talks between the United States and China don't improve soon, the price of crude oil is likely to continue dropping. One thing that could stabilize oil prices is a sharp output cut by the Organization of Petroleum Exporting Countries (OPEC), but that isn't likely to happen until later this summer when the group meets, if at all.

Performance of crude oil

S&P 500

The S&P 500 barely avoided completing a head and shoulders bearish reversal pattern today. The index dropped to an intra-day low of 2,805.49 – which is right in line with the potential neckline of the bearish pattern – before rallying into the closing bell. The index closed at 2,822.24, but traders have got a lot of work to do to stabilize the stock market before the long three-day Memorial Day weekend.

As I mentioned above, independent oil and gas stocks were hit the hardest, but pullbacks in large Technology companies – like United Technologies (UTX), Broadcom, Inc. (AVGO) and International Business Machines Corporation (IBM) – didn't help the bullish cause much.

The one bright spot on Wall Street today was the utilities sector. Utilities stocks rose as Treasury yields fell – making the dividend yields on these stocks more attractive by comparison – and traders started rotating money into more defensive sectors.

Eversource Energy (ES), The AES Corporation (AES) and Duke Energy Corporation (DUK) were the top three performing stocks in the utilities sector, but even their gains were muted at 1.49%, 1.45% and 1.24%, respectively.

Keep a close eye on support at 2,816.94 tomorrow. If it can't hold heading into the long weekend, the S&P 500 may be in for a larger correction.

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Performance of the S&P 500 Index

Risk Indicators – TNX

When it comes to diversifying your portfolio, you have two basic options. You can buy stocks, or you can buy bonds, like U.S. Treasuries.

Now, I recognize that the proliferation of exchange-traded products (ETPs) – like exchange-traded funds (ETFs) and exchange-traded notes (ETNs) – has made it possible to diversify your portfolio into a variety of other assets, like gold, oil and foreign currencies. But when it comes right down to it, most traders are still allocating most of their investment dollars to stocks and bonds.

When traders are more confident that the U.S. and global economies are going to grow in the future, they tend to put more money into stocks and less money into bonds. Conversely, when traders are less confident that the U.S. and global economies are going to grow, they tend to put less money into stocks and more money into bonds. Knowing this, we can watch for signs that traders are moving money from one asset class to the other and extrapolate what is happening with trader confidence.

Today, we saw confirmation that traders are moving money into Treasuries in a big way. When traders start moving money into Treasuries, the price of those Treasuries increases in response to the increase in demand. This, in turn, pushes Treasury yields lower because prices and yields have an inverse correlation.

The 10-year Treasury Yield (TNX) has been in a downtrend since November 2018 as an increasing number of traders have been moving money out of stocks and back into Treasuries. Its most recent support bounce came on March 27, when it rebounded up off support at 2.36%.

Unfortunately for stock market bulls, that level failed to hold today. The TNX crashed through support, dropping to close at 2.30% – its lowest level since Oct. 17, 2018 – as more traders pulled money out of stocks and put it into Treasuries.

Seeing this tells me that some traders are losing confidence in stocks. It's too early to panic just yet. After all, the S&P 500 has been climbing during 2019 while the TNX has been falling, but this is a warning sign that bullish momentum is flagging.

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Performance of 10-year Treasury yields

Bottom Line - Trading the Trade War

Trading the trade war has proven to be incredibly difficult on Wall Street. It seems as though any and every piece of potentially good or bad news has the ability to swing the market higher or lower these days.

Hopefully we'll get some relief soon, but until then, it looks like volatility and uncertainty are going to be the predominant themes in the market.

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