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Page added on April 8, 2016
Here’s why the markets may be decoupling from oil
Well, this is a bit of a disappointment. We have oil flying (up nearly 7 percent!), we have a weak dollar, we have China quiet all week, and we have a dovish Fed that traders believe have put some kind of floor under the market.
And this is all we get? The Dow Industrials up 40 points in a lackluster, average-volume session? In the past months, if oil would be up 7 percent and the dollar would be weak, we would have been up 200-250 points. What’s wrong?
You can argue oil may be decoupling from the markets. Maybe. But the usual suspects that would benefit from a weak dollar are all up: energy, materials, industrials. In fact, there’s more than four stocks advancing for every one declining.
So, why the crummy point action?
I think the problem is that the “V” rally is over.
Remember, we dropped big in January and February on fears of a recession. We rallied back when it became clear that: 1) a recession is highly unlikely, and 2) the Fed is so dovish that they are putting a “floor” under the markets.
So, a good part of the rally was predicated on a dovish Fed, which we now have. A more dovish Fed is now priced in to the market.
As for oil, if you believe $26 is the bottom — and as time goes by it is increasingly looking like that is the case — it is getting harder to get an equity reaction. The main worry was, where’s the bottom?
The problem is not finding a bottom, it’s how much upside there is to the market. Investors are not enthusiastic about buying at these levels because they’re not at all sold on paying up with stocks near historic highs and no appreciable global growth outside the U.S.
What about earnings? We all know that earnings are down four consecutive quarters. Intuitively, this sounds like it is not good news, and I certainly agree.
But all weak earnings does is put a ceiling on stocks. And there is a ceiling: the markets topped out a year ago. Right?
So, we have a floor to the market, and we have a ceiling. What’s this all mean?
Trading range. I said the market was a “solid hold” two weeks ago, and nothing I have seen since then has made me change my mind.
What would change this dynamic? If we could inch our way to a new high — 2,130 was the old historic high, way back in May 2015 — it would be a breakout from the range and might force some marginal money back in.
What could go wrong? We got an inkling this week: if investors come to believe that central bankers are toothless tigers. Haruhiko Kuroda, governor of the Bank of Japan, implied more quantitative easing was coming this week, and the yen rallied. Not good. Confidence eroding.
There’s still confidence in ECB President Mario Draghi and Fed Chair Janet Yellen, as worry, but the cat is out of the bag, and worry about the limits of central bank intervention can now be added as a risk factor.
10 Comments on "Here’s why the markets may be decoupling from oil"
makati1 on Fri, 8th Apr 2016 8:06 pm
I see a huge, very sharp pin approaching the global financial bubble…
joe on Sat, 9th Apr 2016 12:48 am
One thing to factor in is that hedge funds are the biggest players. The Dow collapsed at the start of the year, one of the most obvious aspects but least reported is the scale of corruption in the markets, which are not free. People always try to pull them one way or another.
Hedge funds make money when markets go down, they also then make a killing buying back shares for pennies then hedging them again.
Oil is a commodity so its only important in terms of how its factored into consumption models and how they manipulate prices. Oil is so depressing markets as its low price directly impacts oil companies being traded, ironically oil consumers like retailers etc should be going up but they are losing money as wages stay depressed and people are credit shy as a legacy of the continued Great Recession.
GregT on Sat, 9th Apr 2016 1:44 am
joe,
Oil is not like any other commodity. It is the source of energy that every other commodity, and all of our economies require. No oil, no hedge funds, no DOW, no markets, no retailers, no food, no modern industrial society, and no 7 billion people + on this planet.
Gamma999 on Sat, 9th Apr 2016 7:30 am
Keep ignoring the Rapid Growth of Solar and Wind, and you’ll never understand what’s going on.
SPYX is doing better and better every day.
onlooker on Sat, 9th Apr 2016 7:56 am
Keep ignoring the reliance of Renewable on FF and thus on a vibrant economy/vibrant consumers and keep ignoring the difficulty of scaling them up to meet all the needs of this complex and super populated world and global economy and you will begin to understand what is going on
Bob Jones on Sat, 9th Apr 2016 8:23 am
This article is so lame, I hope the author loses everything.
dooma on Sun, 10th Apr 2016 2:32 am
I have been watching the Dow climb as the rest of the world’s markets are in deep shit. Yet the US has a similar bad balance sheet.
Something fishy is going on.
onlooker on Sun, 10th Apr 2016 4:21 am
Nothing fishy at all. The markets once again not even remotely reflecting reality. Just being rigged and following their own emotional triggers that feed unto itself. Herd mentality, market swings, irrational exuberance, balloon inflating, ponzi schemes are all just examples of this.
Davy on Sun, 10th Apr 2016 7:22 am
It is well known and demonstrated the markets are rigged. Those benefitting know this but don’t talk about it. Many who love to talk about these things are exposing this crime. Although can you call it a crime anymore because it is just moral hazard policies from the top.
We are now into legalized theft. It is called the new normal of central bank intervention supposedly for all our good. In some ways it may be good because we will never know how bad the collapse would have been without that intervention in 08. The issues is we think we are getting out of jail free but we are not. We got a temporary get out of jail card. The electric chair is ahead and no avoiding it.
The markets are rigged at all levels and they are rigged to maintain the unmaintainable. Confidence in the system is absolutely necessary in our dispersed interconnected highly complexed global system. That is a lot of worlds for insanity we created and now can’t leave. “This sucker is goin down” like our buddy GW said in 07 except there is no “IF” like GW said. It is when and how hard.
In one sense the rigged markets serve a point because it has bought us time but the sad truth is we have squandered that time so it turns out to be a farce and a waste. All that has happened is the rich have gotten richer without any house cleaning. The markets are a joke. They are not markets anymore they are a rigged casino of people believing digital and paper stuff represents wealth. Markets are legalized criminal enterprises run by criminals who are running a Global Ponzi scheme.
The real absurdity is the criminals are all our global leaders who participate and chose not to speak out. This is the end game and so similar to all end games of previous civilizations where corruption and exploitation bills become due. Nature calls in here “vigorish”
onlooker on Sun, 10th Apr 2016 8:12 am
Well said Davy well said.