Oil, stocks may be just in 'trial separation'

Minutes from the Fed's last meeting and housing starts are two key events for markets Wednesday, as traders watch to see whether oil and stocks can continue to diverge.

Stocks rallied hard Tuesday, with the S&P 500 up 1.7 percent to 1,895, and the Dow up 1.4 percent to 16,196. With Friday's sharp gains, West Texas Intermediate futures were 1.4 percent lower, at $29.04 Tuesday after hitting a high earlier in the day on a report that Saudi Arabia, Russia and two other producers agreed to 'freeze' production levels. Those gains were quickly erased as traders realized there would be no reduction in supply.

But stocks kept rallying, even as oil sank, breaking a recent pattern of moving mostly in lockstep. "I think it's a trial separation. I don't it's a full divorce," said Art Cashin, director of floor operations at UBS. "If (oil futures) break $29 tomorrow, let's see if they pressure (stocks)." Cashin said stocks moved higher as traders focused on other things, like the positive retail sales report from last week. He said the $12 billion Apple debt offering also helped sentiment.

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"You had people feeling that you're kind of back to normal," said Cashin of the Apple offering. Last week, debt offerings were at a standstill as investors panicked in a flight to safety move and risks assets sold off until late in the week.

Ari Wald, technical analyst at Oppenheimer, said the stock market is taking a rest from the selling, and the S&P 500 could make it back up to 1965. But he does not expect any gains to hold. "This is a countertrend rally, a bear market rally. It assumes strength is going to be met with selling pressure. The global breadth of stocks has been very bearish. We still think the burden of proof is on the bulls," he said.

Wald said the S&P could ultimately dip down to 1,730/1,740. "We're capped to the upside, and rallies are to be sold unless we see three things — internal breadth broadens, cyclicality is embraced and credit gets better," he said.

On Wednesday, January housing starts are released at 8:30 a.m. as is PPI producer inflation. There is also industrial production and utilization at 9:15 a.m. The Fed minutes are released at 2 p.m.

Economist Diane Swonk said she is particularly interested in housing starts as a measure of the health of the construction industry. "The most important issue is what's going to happen to the single-family versus the multifamily housing," she said. In December, housing starts fell 2.5 percent from the month earlier to a seasonally adjusted annual rate of 1.15 million. Building permits also weakened, dropping 3.9 percent to 1.23 million. Single-family homes fell 3.9 percent while apartments and condominiums declined by 1 percent. Economists had expected more strength in December because of the warm weather.

January housing starts are expected to increase by 2.6 percent, and building permits are expected to be flat.

Fed minutes will also be important, as traders watch for any clues on the Fed's intentions on rate hikes and its views on the economy. Fed Chair Janet Yellen spoke before congressional committees for two days last week, but the minutes could still be illuminating. Yellen noted that the Fed is more cautious on the economy as it watches international developments, but it also remains on a path to hike rates, depending on the economic data.

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"The issue is how much they talk about risks," said Swonk.

As for oil, the weekly Energy Information Administration data that usually comes out on Wednesday will be released Thursday this week because of the Presidents Day holiday. But the expectation is for a build in supply, negative for oil prices.

Reports of a surge in supply in Cushing, Oklahoma, helped dent the rally started by the headlines about a producers' agreement.

John Kilduff of Again Capital said there was a report Tuesday from Genscape that noted 700,000 barrels went into storage in Cushing last week. That added to the view that there would be a big build in supply this week, a negative for the market, he said.

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Kilduff said the market shrugged off the producers' comments. "It was so absurd in so many ways," he said. Russia and Saudi Arabia agreed provisionally to freeze production at current levels, which analysts say would not help the supply glut.

Chris Weafer, senior partner at Macro-Advisory, said the announcement was intended as a message of optimism for speculators and an effort to keep crude from sliding back under $30 per barrel. "Russia and most OPEC producers (ex Saudi) are currently producing at maximum and both Saudi and Russia are near record high output. So freezing output means nothing as it is doubtful if Russia or OPEC could raise production much beyond current levels in any event," he said in an email.

But Helima Croft, chief commodities strategist at RBC Capital Markets, said the announcement was also an important signal to the market that "all is not well" with the biggest oil producers. Russia is the largest oil producer followed by Saudi Arabia. "…It signals a true potential willingness to be more proactive later in the year," she wrote in a note. "…It puts the ball back in the court of those who would not or could not comply (Iran and Iraq)."

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