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Did Oil's Decline Take the Stock Market Down?

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If oil has been leading the broad markets lower, should it find support at $84 and reverse, that could presage a reversal in the broader market.

Did the sharp sell-off in crude oil trigger the meltdown in stocks? While there are plenty of potential reasons for the stock market to drop--stretched valuations, the slowdown in Germany, Japan and China, etc.--it occurred to me that the recent sell-off in crude oil might have served as a trigger.
 
Any sell-off in a sector that represents a significant share of the stock market has the potential to trigger more selling, which then begets more selling. Energy is a sector that is generally well-represented in institutional holdings and mutual funds.
 
Once oil broke key supports, institutional money managers reading projections of $60/barrel oil apparently decided to exit oil and oil services en masse.
 
Given the weight of this sector in portfolios, mass unloading of oil stocks would negatively impact the entire S&P 500. If oil being dumped caused the market to breach key technical levels, that would cause managers to trim risk-onportfolios. This selling would then beget more selling as the downtrend gathered momentum.
 
We can look for some correlation by comparing the charts of WTIC (crude oil) and SPX (S&P 500). Oil topped in June and rolled over into a downturn that gathered momentum once the 50-day moving average (breached in early July) and 200-day moving average (breached at the end of July) gave way.
 
An attempted reversal in crude oil failed in late September, ushering in a brutal $10 cascade down to the $84 level.
 
Interestingly, though the SPX continued slogging higher after oil rolled over, the MACD of SPX began declining in July along with oil.
 
Shortly after oil broke its critical 200-day moving average, the S&P 500 suffered a cascading downturn that sliced right through its 50-day MA.
 
As oil continued its slide, the SPX recovered and reached new highs. But once oil broke down in late September, the SPX started wobbling. Once it lost its 50-day MA, it yo-yo'ed violently for a few days and then broke down to its 200-day moving average.
 
Crude oil has declined to possible support around $84, and the stochastic has turned up, signaling a potential reversal.
 
If oil has been leading the broad markets lower, should it find support at $84 and reverse, that could presage a reversal in the broader market.
 

This correlation is of course very speculative and may turn out to be a mere mote in my eye. Nonetheless, it bears watching WTIC in the weeks ahead to see if its turns continue to impact the broader market's direction.

 

*  *  *

Additionally, the total collapse of bullish bets on Brent crude in the last few weeks - to record lows - suggest the long-squeeze may be running dry of ammo...

 

*  *  *

Crucially, as we explained in detail here and here, if the manipulation of prices of crude oil lower by the Saudis is indeed a US-friendly anti-Russian move, how much equity market pain (and thus created wealth) is America willing to take for the use of "The Oil Weapon"?

 

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Sat, 10/11/2014 - 17:50 | 5318935 ekm1
ekm1's picture

Of course it did:

 

3 ways for the Fed or US Gov to call margin on the system:

 

- interest rate rise

- dump commodities from storage into consumption

 

- drain dollars

 

They system is hyper over leveraged

Sat, 10/11/2014 - 17:55 | 5318951 90's Child
90's Child's picture

No our shitty Monetary policies did.

Sat, 10/11/2014 - 18:02 | 5318969 Squid-puppets a...
Squid-puppets a-go-go's picture

its just a symptom of the Fed's policies painting every other arm of govt into a corner with it. The military arm, the trade arm, none of these can make any significant move on the chessboard without exposing the stock market

Sat, 10/11/2014 - 19:26 | 5319140 kaiserhoff
kaiserhoff's picture

Charles is slipping badly recently.  There are many more oil users than oil producers.  This is the equivalent of a massive world wide tax cut .  It is just coming very late in the game. 

Demand is falling everywhere, because no one is earning any real profits.  The ponzi is twitching in its death spiral.

Sun, 10/12/2014 - 04:19 | 5319951 rocker
rocker's picture

Kind of Amazing how all the metal commodity prices fall and all concede that their is ample above groung supply.

But with Oil having a record above ground supply their are still those who deny a simple fact. There is too much Oil. 

Sat, 10/11/2014 - 19:33 | 5319158 Lets Buy The Dip
Lets Buy The Dip's picture

basically the Govt know you think this, but realistically they....

1_) bring ebola out, to scare market

2_) get BEARS short....

then 3) Rally the market, when everyone least expects it. 

eurozone smashed the market this week. Could be more down, but have a look at the TICK reading so far here ==> http://bit.ly/1fMcakI normally when the tick reading gets down this low you will see a solidy 1-2 day bounce, that can make you alot of money short term, / swing trading.

To me this downside is just another opporutnity for the smart money guys to TRICK all THE BEARS in again. Soon the bears will wish they were never born!!!, yes. That old chest nut. :-)

 

Sat, 10/11/2014 - 20:11 | 5319252 Think Like A Crook
Think Like A Crook's picture

So, what are you asking Santa Claus to bring you this year?

Sat, 10/11/2014 - 19:51 | 5319203 F0ster
F0ster's picture

This is what triggered the 2008 crash too

Sat, 10/11/2014 - 17:54 | 5318949 bearparty
bearparty's picture

Can somebody explain why falling oil prices would cause a drop in the rest of the market?

It seems more likely to be other factors, such as political tensions.  The drop in the price of oil being one indicator of how serious things are. 

Sat, 10/11/2014 - 17:59 | 5318960 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

The drop in the price of oil being one indicator of how serious things are. 

I believe the correct answer is NO DEMAND for oil as the world economy collapses.

Sat, 10/11/2014 - 19:13 | 5319107 espirit
espirit's picture

Nobody's buying cheap China expendables, therefore lessor oil demand all throughout the supply chain including shipping.

 

The smart and savvy in the USSA are hunkering down, QED.  

Sat, 10/11/2014 - 18:02 | 5318972 GotGalt
GotGalt's picture

A decently large % of the S&P 500 is tied to oil in some way, so that is part of it.  Also, declining price in oil sometimes is caused by falling demand which is never good for economic bullishness.  A lot of high paying jobs are in the energy field also, so a plummeting spot price could lead to company finance issues and layoffs.

Sat, 10/11/2014 - 19:52 | 5319209 Freddie
Freddie's picture

^^^^

This

Oil and oil services companies are big component of the stock market.  Take a look at OIH which is oil services ETF.  It has been destroyed.

The Fed has been trying to make people rich pumping the stock market.  The elites switched to destroying oil to destroy Putin and Russia.   What evil clowns control Amerika.

 

Sun, 10/12/2014 - 20:40 | 5322365 nidaar
nidaar's picture

Why gold miners dropped too then? With lower gas prices, they should be heading towards more profitable operations, if they were operating at the brink of zero profitability due to high costs...

Sat, 10/11/2014 - 18:05 | 5318976 Squid-puppets a...
Squid-puppets a-go-go's picture

lower oil price implies lower transport and manufacturing activity implies recession implies ridiculous valuations on current stock prices implies SELL SELL FUCKN SELL NOW!!!

Sat, 10/11/2014 - 18:07 | 5318979 kowalli
kowalli's picture

Do you know words - PETRO -dollar?

it mean - couple of oil and dollar, oil - dollar - all world assets...

Sat, 10/11/2014 - 18:01 | 5318966 deeply indebted
deeply indebted's picture

That's a retarded theory.

QE ending isn't a good enough reason for you?

The liquidity trap just doesn't feel quite real enough?

Did you think we'd reached escape velocity or something?

Did you think this bubble wouldn't crash on its own?

Are you implying that if oil wasn't getting crushed for political purposes that we'd still be seeing daily all time highs even without Fed liquidity?

Is that you, Jim Cramer?

This article belongs on Yahoo, MarketWatch or maybe Business Insider...

(Yes, I'm rolling my eyes, btw)

Sat, 10/11/2014 - 18:10 | 5318984 Midas
Midas's picture

I remember when equities would fall if the price of crude went up and equities would rise when the price went down.  It is almost like everything is rigged and manipulated, but how likely is that? 

Sat, 10/11/2014 - 18:12 | 5318986 deeply indebted
deeply indebted's picture

Yup

Sat, 10/11/2014 - 20:14 | 5319266 Freddie
Freddie's picture

I cannot stand the Bushes, Clintons or Obama as they are all NWO-MIC-See Eye Aye stooges but gas was $1.80 under Bush.  Obama is more of an oil crony capitalist than anybody.

Sat, 10/11/2014 - 18:03 | 5318971 observer007
observer007's picture

WTI decline because of ebola

Means: no travel, low consumption, decline of eco

 

***************

8000 Ebola victims

58 now in NZ

Latest:

http://tersee.com/#!q=ebola&t=text

Sat, 10/11/2014 - 19:14 | 5319102 Everybodys All ...
Everybodys All American's picture

No doubt that's the same as I see it. The panic of Ebola is causing many to stress over global travel and trade and this will restrict global growth. No central bank can print their way out of this problem and they know it. The printing game is over if there is no control over Ebola.

Sat, 10/11/2014 - 18:13 | 5318987 One And Only
One And Only's picture

It's always been my view investing and otherwise that deflation and price drops are always good for the consumer and the wise investor. Unless you have a bias to be long from speculative standpoint and prices go down that sucks for you. 

However, if the price of oil get's cheaper. I'd love to buy some. If the price of homes get cheaper I'd love to buy another one. That's what I could never understand why the USG and FED were always trying to make the price of homes expensive....I mean a lot of people speculated and were irresponsbile, others got hurt who were;t irresposnible and were a victim of the circumstance. But I can't see how the price of homes being expensive helps anyone, I mean it's a 0 sum game except for first time home buyers.

People always cry about how the value of their home went down. Well...the value for everyone's home went down. So you sell your home at a loss but guess what? The next home you buy is going to be at a discounted price too. You lost $100k on your home? Well the next home you buy is is at a 100k discount. The people getting hurt by artifically boosting the prices of home is....the first time home buyer.

I know I'm a contrarian when it comes to this but the best way to help the economy recover is by allowing the market to operate and if deflation is in order let it happen. I love buying nice things at cheap price. 

Wage inflation is another topic all together. But if you are smart, productive, and help generate your company revenue you will always be compensated justly. If you are a piece of shit with no skills you're going to be paid as such. Problem is we have imported soooo many illegals from third world countries, who can't speak English, are unitelligent, and have no skills. So of course you are going to have wage deflation as a whole. 

Obviously the price of oil dropping helps the consumer. To be honest a well run oil company won't be hurt that bad because they know to reduce capacity, make labor changes, etc. Unless of course the price becomes too low where it doesn't make sense to drill - which lowers supply - and increases the price.  The price oil falling isn't neccesarily, at least in my opinion, the greatest gauge of measuring the health of the economy. Why? Because the efficiency for producing oil is orders of magnitute better than it was in say 1995. New technologies like fracking have allowed us to produce at a lower cost and in places we normally wouldn't have been able to drill. Another main driver of higher oil priices is politicians. With so many restrictions, taxes, fines, etc it makes it very difficult to drill in the US. However, every American would benefit if those restricitions, taxes, fines were release and we could actually access the natural resource we have under our feet. 

By simply looking at one metric like the price of oil relative to the economy and saying...the price is going down, no one is driving, etc is ridiculous. My ass is stuck in traffic all day long as are most of the people I know. So people, from a real life point of view, at least where I live are driving a lot. 

With the FED printing less money that is really the determining factor. There is less demand for high yielding bonds, stocks, houses, oil futures, etc. But if you have one entity cornering every market that's not a market. All prices for everything are not reflecting reality and nor should they be. All you have to look at when the FED says QE is stopping - prices for everything go down. When they announce QE (that they will be printing more money) prices go up. Market participants aren't looking at p/e ratios etc (at least they shouldn't be in the new normal). If the FED says we are slowing down on the money printing - sell. When they announce they are starting a new round of money printing -buy. 

It's all really that simple. 

Sat, 10/11/2014 - 18:40 | 5319037 Bossman1967
Bossman1967's picture

even at 3 dollars a gallon that's not cheap what the hell are these assholes talking about show me half that price then this economy will hummmm but at 3-4 how do the lower middle and poor even crank thier cars I wonder? do they also have welfare gas?

Sat, 10/11/2014 - 19:09 | 5319085 One And Only
One And Only's picture

In 1996 the minimum wage was $4.75. The price of gas was $1.23 a gallon.

Today in some places the minimum wage is $15 an hour. However the Federal minimum wage is $7.25. Now don't forget there are a ton of Federally funded programs now to help people making the minimum wage so the minimum wage is really a lot higher than $7.25. There is obviously going to be disparity from state-to-state etc.

So really this is all relative. 

Also keep in mind that a plethora of new technologies have been created that have made wages in the private sector much higher. $3 a gallon is actually unaffordable if you're using the 1996 minimum wage metric. Now there is a counter argument too that one must accept. A lot of the new technologies that offer high wages have also in a large capacity reduced the labor force as jobs have been replaced with technology. 

The main problem as I see it is that the government is importanting too many immigrants and the wrong type of immigrants. Immigration is awesome if you're attracting innovative individuals with high IQ's. The US is fostering a policy where we are bussing in people who can't speak Engish, have incredibly low IQ's, are bringing with them diseases, and really can't do much but menial skills (which are the jobs that can be replaced by CPU's)

Socialism and the like works with small countries like Nordic countries. Most of the people work hard, have high IQ's, low propensity to commit crime, and high impulse control. They work hard, don't go to the doctor much, have lower incarceration rates, and they innocate. 

An immigrant from Germany/Sweden is NOT the same as an immigrant from Liberia or Honduras. 

We are bringing in the wrong people and way too many of them. It will eventually, overtime, destroy the country. 

Sat, 10/11/2014 - 19:22 | 5319129 rbg81
rbg81's picture

The people who they are bussing in these days have only two actual skills:

1.  They will immediately be clients of the Entitlement State (helping to keep AFSME and Teachers Union members employed)

2.  They will vote democratic forever (legally or not)

That's the ONLY thing that is driving our insane immigration "policy".  No one even bothers to ask what is really good for the country anymore.  That very important question is considered racist.

Sat, 10/11/2014 - 19:08 | 5319095 algol_dog
algol_dog's picture

"I love buying nice things at cheaper prices"

Great if you have the cash to spend, but also I'd ask, why buy today when tomorrow it can be cheaper, maybe much cheaper? Deflation is bad because it favors holding cash and its equivalents, rather then spending and investing. That in turn feeds upon itself in a spiral fashion. If your a first time buyer, why buy a house today when it will be cheaper tomorrow? If you can sell your house and hold the cash, the value of the cash will go up while the value of housing goes continues down. Wages stagnate, or go lower altogether. Loans have to be paid off with "premium" valued, harder to acquire dollars, rather than inflated, easier to acquire "cheaper" dollars. 

Sat, 10/11/2014 - 22:18 | 5319139 One And Only
One And Only's picture

You have to take into account that there are different kinds of people. Some are impulsive, get into debt, and have no money. Some people a frugal, save, and work hard. There's also that happy medium kind of person.

Let's take my grandfather. He's 94. He drives a 2000 Lincoln towncar and lives in a retirement community (house valued around $200,000). He literally spends no money except on food and gas. He's been like that his whole life. We just found out that he had a brokerage account. Since the 70's he allotted a small amounts into stocks (like exxon, etc) and just continued reinvesting the dividends. He never told anyone and seldom talked about it. We just found he's worth over $2,000,000 dollars. Now he worked hard his whole life, didn't gamble, didn't spend like a drunken sailor and it turns out he's quite rich. 

So if you're responsible, save, invest wisely, don't act irresponsibly it pays off over time. Unfortunately there are not many people like him. And you are right there are a lot of people who don't have money but in all honestly that's their fault in most cases. 

Now to your question why buy a house today when it could be cheaper tomorrow? If you look at the economy in a rational way you'll buy when you feel the price is right. 

Let me ask you a question. Would you rather buy a 2,000 sq/ft home for $200,000, $100,000, or $50,000? The obvious answer would be $50,000. So if you work hard, save, and exersice discipline, you (in a free market) would get the home for $50,000. But with the FED and government keeping the prices of homes artificially high new home buyers get priced out of the market, and people who are intelligent and save opt out of buying. It creates an environment of irresponsibility and asset mis-allocations. The people buying homes in recent years on mass were hedge funds and private equity firms speculating and taking advantage of the FEDS free money policy.

Like I said. I love deflation because I'm responsible with my finances. I don't overburden my self with debt and I have a lot of money. When prices come down to where I feel they should be I will buy. I personally don't see any investment reasonably priced, whether it be stocks, bonds, or real-estate. 

Do you know what Janet Yellen is thinking? Seeing as the FED has cornered every market to such epic proportions how could you feel comfortable investing in ANYTHING? I don't know what Yellen is thinking and what her decisions are, and really her decisions alone, are the only factors that determine what the true price of anything is. She could announce QE4 and send prices god knows how high. She could stop QE completely raise interest rates and everything can collapse. How do you invest in a market where that is the driving principle?

Sat, 10/11/2014 - 20:45 | 5319330 potato
potato's picture

the argument ad inifitium quoted in economics textbooks against deflation is bs. people will buy today because they need to eat today, drive today, live somewhere today -- even if they expect prices to be cheaper later. 

seriously. why don't people just buy all their food and clothes on black friday? it's because of the aforementioned

Sat, 10/11/2014 - 18:25 | 5319009 new game
new game's picture

simpler yet - don't participate. i worked to hard for my money...

Sat, 10/11/2014 - 18:28 | 5319019 cpnscarlet
cpnscarlet's picture

Remember the days when a drop in energy costs was the Holy Grail of increasing stock prices as productivity and profit margins increased?

But this is the New Normal...

Sat, 10/11/2014 - 18:56 | 5319073 booboo
booboo's picture

Oil could drop to 40 and the trucking industry would still keep their "fuel surcharge" in place, it's part of their margin and they ain't giving it up. Now toss in government, as things wind down they keep tightening the tax thumb screws.

Sat, 10/11/2014 - 19:02 | 5319083 NoDebt
NoDebt's picture

Because "oil" isn't the same thing as oil.  "Oil" is a paper asset.  Oil is a real commodity used in the real economy.  

Wall St. trades "oil", not oil.  And there are no negatively correlated paper assets any more.  It's Wall St. AGAINST the real economy, not reacting to it.

Sat, 10/11/2014 - 18:33 | 5319023 Bossman1967
Bossman1967's picture

every week it's something else and for no appearent reason things go back up!?!? I know 1 plus 1 equals 2 but the world is crazy. they will print more fiat gold silver bonds derivatives and whatever they must untill the electons then the lame duck congress gonna bend us over and fuck us so hard we will never see the light of day again.

Sat, 10/11/2014 - 19:01 | 5319049 Salah
Salah's picture

Oil priced in dollars = global 'sponge' for Fed

Hi-oil prices = takes pressure off Fed to raise i-rates

Neptune in Pisces = oil is found everywhere, by nearly everybody

More oil = lower prices = probability Fed must raise i-rates to support dollar

It's the "linchpin" of the PetroDollar Imperium, but take just 2 recent examples:

Kara Sea = 3-400 billion barrels (?), so waht it's Russia; ditto Aregentina's Vaca Muerte = (accd to Repsol) 660+ billion barrels & 1500+ trillion cu ft natgas.

The PetroDollar Imperium simply cannot handle that kind of supply on world markets.

Sat, 10/11/2014 - 19:34 | 5319137 Son of Captain Nemo
Son of Captain Nemo's picture

Did the sharp sell-off in crude oil trigger the meltdown in stocks?

Yep! It sure did!!!...

And will it continue? 

Nope! Oil can't stay down if Saudi Arabia, Qatar and UAE want to survive, because it will be the death knell for the tent dwellers in that part of the World that no longer carry the reserves anymore that depend on the unstable countries oil field(s) they helped to destroy in Iraq, Syria and Libya to compete against the likes of Russia and Iran! 

After all.  What good are those sabotoged oil fields if the governments around them you made unstable are at war with the terrorists you are killing them with??? Let alone the foreign nationals that require military protection just to do their job of looting and the costs that are necessary to make unstable "stable"?!!!

If this keeps up, China will be getting at the front of the line with the oil the EU would have gotten and then it's fracking "season all over the world" for the U.S. and EU as compensation!

Stock market???... Who the fuck cares about an HFT ridden stock market when Russia and China have all the Au and Ag to make a stable energy based economy and "currency" with???

Game, Set Match, Russia!


Sat, 10/11/2014 - 20:39 | 5319321 potato
potato's picture

yeah, oil can't go down to 60 or even 65. too much demand. at least that's my bet, because i've learned it's never as good or as bad as the projections you see in the media.

Sat, 10/11/2014 - 20:55 | 5319365 alexcojones
alexcojones's picture

Gas prices at pump in Phoenix $3 or less now.

Fuck the stock market and the bots they rode in on.

Sat, 10/11/2014 - 20:57 | 5319370 viator
viator's picture

Did oil and stocks both go down because sovereigns may be running out of QE bombs? Is price discovery making a comeback?

Sat, 10/11/2014 - 21:23 | 5319436 Stained Class
Stained Class's picture

Charles, first of all, I hate your title that ends with a ? Are you like CNBC ? Crowdsourcing to get the article written for you?

That aside, you raise decent point. Yes, lower income for oil producers would be a reason to sell those stocks, but more money in the pockets of comsumers would boost many other stocks.

Its an ETF world, and if you're an oil bull yet you choose SPY as your investment play? When you sell SPY, you sell everything in the S&P 500 in weighted unison.

Back to Charles Hugh-Smith: I think you didn't go far enough into why the decline in oil prices is bad for stocks: calculate some level of DEBT. Nothing scares investors like a good financial crisis, one that hits the banks. How much debt has been issued in ZIRP conditions , what is the grand total, who will get hit with losses if/when oil companies default on their bonds and bank debt?

The only deflation The Fed cares about is the deflation of bond prices, and their inability to pay interest (repayment of principal is not a concern; refinancing is a great revenue stream for the Fed's franchisees).

If one oil producer goes under, its just a technicality because the wells won't be shut down, another company will assume the assets and carry on. This new fracked oil is here and won't be going away anytime soon. This just might be the great equalizer between main Street and Wall Street, where lower oil prices greatly benefit 99%-ers.

There's so many angles to this story, its amazing that an opinion can't be formed without a question mark attached.

 

Sat, 10/11/2014 - 22:06 | 5319548 Playtime's Over
Playtime's Over's picture

Don't hear that guy running around screaming about peak oil anymore do ya.  I always thought it was a one trick pony and quite stupid. Who the fck knows how much oil is down there.  

Sun, 10/12/2014 - 01:37 | 5319878 hedgiex
hedgiex's picture

A retard correlation of oil prices with equities. Traders really trade against slowdown of China etc for Oil. Institutional Fund Managers have mandates from their clients among which are Soverign Wealth Funds. They just collectively dump oil and equities and pay obeisance to US$. Wake up and look at fund flows, BRICS matter today.

Sun, 10/12/2014 - 09:12 | 5320151 anomalous
anomalous's picture

Prices will firm up after the election.

Sun, 10/12/2014 - 14:37 | 5321276 sohailelder
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