Major averages fell yesterday on lower volume as the S&P 500 met resistance at its 10-week line. Oil fell during trading and after the close due to remarks by Saudi Arabia Oil Minister Ali al-Naimi that killed off any lingering hopes of a production cut. Coordinated efforts by the producing nations to stem oil production indeed seem unlikely at this juncture. Thus both the technicals and fundamentals in oil point to a continuation of the downtrend. This in turn will likely serve as a continued headwind for stocks.
Last night J.P. Morgan (JPM) announced that it was adding $500 million to its loan-loss reserves. The company has also indicated that another $1.5 billion could be added if the price of oil stays around $25 a barrel. Raising reserves means forced selling in the form of liquidation. Institutions like JPM will sell assets that are easiest to sell, and usually that means stocks first. If JPM needs to raise reserves, then likely the same or similar scenario is playing out at countless other institutional firms. This is the source of forced selling, a concept we discuss frequently in our reports and live webinars.
Futures are currently off roughly 1% at the time of this writing.
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