Oil Continues to Collapse

For a change, the S&P500 ended a week on a down note with the index giving up 1.5%. Volume was light, but that was not a surprise given that the week was shortened by the new year holiday. Consistent with the fall in prices, the VIX index jumped a bit as investors bid up downside insurance protection.

What stood out however was that the much anticipated—and usually occurring—Santa Claus rally failed to deliver. Instead of rising in the period between Christmas and New Year’s, the S&P500 (and most other US equity indices) fell.

The question now is—does this mean anything for the new year?  And while it’s not a good start to 2015, the historical data shows that a poor start does not mean that a poor year is a certainty.

But the trigger to the sell-off last week isn’t something new. It’s a series of very ugly economic reports that shook the equity markets. While in the past, bad news actually pushed markets higher (on hopes for ever more Fed easing and printing), this time (perhaps now that the latest round of QE has ended), the bad economic news sparked bad news in the stock markets.

The week began with a dreadful result from the Dallas Fed’s manufacturing survey. It continued with disappointing results from the consumer confidence survey as well as initial jobless claims which jumped a bit higher. But then the Chicago PMI index really disappointed and by Friday, all hell broke loose when PMI manufacturing missed expectations, ISM manufacturing plunged and construction spending collapsed.

But keeping things in perspective, the S&P lost only 1.5% and in terms of technical analysis, the damage was barely visible, especially on the weekly charts.  And even on the daily charts, where the sell-off was at least perceptible, the 50 day moving average was still rising solidly and it was positioned well above the 200 day moving average.

The bottom line is that it would take a whole lot of 1.5% weekly drops to do any serious damage to the major trend—the rising 200 day moving average—that’s still in bull market mode.

Finally, and perhaps more interesting than the stock market, is the total melt-down in the oil markets. West Texas as well as Brend crude have now collapsed in a way last seen in 2008….only months before the equity markets collapsed themselves.

So investors are wondering if this time will be different?  Will the same amazingly accurate leading indicator that preceded the global economic meltdown in late 2008 announce the same grim warning for 2015?

Given how critical oil is to the global economy and to markets, it seems hard to believe that there will be no serious consequences—to the oil industry and to the capital markets that are attached to the price of oil.  But only time will tell if the damage will lead to contagion. In other words, we don’t yet know if the pain being caused by oil’s collapse will be contained or if it will spread and lead to pain in other industries and other financial markets around the world.

Oil is now a big story. Wise investors are paying close attention.

 

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