The Next Oil Rally Is Here

Stocks traded flat this morning as investors geared up for a week of major events. The Dow, S&P, and Nasdaq Composite all remained mostly unchanged through noon.

But sentiment should swing significantly by week’s end after the Fed announces a rate hike (Wednesday) and Q2’s GDP growth rate is revealed (Thursday). Investors expect a 75 basis point hike when the July FOMC meeting wraps up, but Wall Street cautioned the market that a 100 basis point increase might be on the table following June’s hotter-than-expected Consumer Price Index reading.

Still, odds favor a 75 basis point hike amid an ongoing economic slowdown.

“Investors likely believe Thursday’s GDP report will show a second quarter of decline, which is the unofficial signal of recession,” said CFRA Research chief strategist Sam Stovall. “While the Fed will probably announce a 75 basis point rate hike on Wednesday, they will offer a more moderate tone towards further rate increases. We see this counter-trend rally continuing in the near term.”

Oppenheimer chief market strategist John Stoltzfus correctly observed, meanwhile, that the market will still have plenty to worry about even if stocks rise through the end of the week.

“Whether it’s a rally from an established bottom by the market or a ‘bear market rally,’ there’s fodder for argument between bulls and bears in any given moment in day to day market action,” he said.

As usual, the biggest piece of “fodder” is the Fed’s coming rate hike. Poor economic data has encouraged investors that the Fed will back off its aggressive tightening plans due to a slowing economy. We mentioned early last week that “bad news is good news” again due to the market’s recent rally, which Barclays analyst Emmanuel Cau echoed in a Friday note.

“Equities have managed to stage a rally [month to date], and climb a wall of worry. The bounce has been led by cyclical and growth stocks, helped by longer end yields stabilizing, which in turn eases the pressure on P/Es,” Cau wrote.

“This confirms to us that the market’s focus has switched from inflation worries to growth worries, with a sense that bad news is becoming good news again.”

Despite many stocks rallying strongly last week, some sectors still boast attractive valuations. Well, relative to where they were trading last month, at least. The energy sector particularly appears poised to rally after oil stocks soared this morning.

Marathon Oil (NYSE: MRO) jumped over 5.5% higher today but remains down over 30% from its early June high. The same is true for nearly every other big name in energy. Before June’s dip, oil shares enjoyed a vertical ramp ever since stocks crashed in response to Covid back in March 2020.

The June sell-off may have provided traders with another shot to snap up some energy stocks on the cheap before the next blast higher.

And that may be arriving soon if investors like what they hear this Wednesday in Powell’s post-FOMC remarks, which have historically led to major afternoon rallies.


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