Because of the turmoil that was happening in the Middle East, most were taking a bullish view.
If you tell me the reason the broad market has declined is because of the fall in oil, I infer that you must have known what the broad market would have done if oil had not declined. That’s impressive for sure. I personally don’t have a clue where the markets would have been with stable oil. I’m just not that smart.
Oil will rise as soon as as russia is totalky wiped out by USA and OPEC
Putin messed with USA and now facing the heat
Yesterday I did a few day trades on an S&P500 ETF for quick bucks; turned my hedge into a long, let the index rise up, put the hedge back on, rode it back down. The index was darn near exactly tracking the price of oil all day (I kept my eyes on oil and traded based on that). All these fake ups interday are pointless, oil keeps going down, and the indicies end down. Oil is all people are looking at. I guess that continues until it stabalizes, or they become numb to it.
Why stocks are going down? 1) a lot of people believe we are “at the top” because their local index is high, simple, 2) everyone lost their money in 2008 and is ready to get out fast this time, 3) in the US they don’t really believe the “positive” economic numbers and discount that to nothing in favor of something real, 4) perhaps a lot of people are shorting oil and equities, I am, plus deleveraging, 5) fast/massive changes in prices are scary as hell, 6) the pain happens first (defaults, global shifts) followed by the bliss (increased profits from users of oil), 7) QE just ended and things are fragilely balanced, oil is something that could potentially push them over the edge. QE4 by Q2? Oil seems to be the #1 driver in equity markets right now, except on the Shanghai exchange where they could care less about the outside world. CSI-300 up again! I’m betting on increased profits for the already undervalued Chinese equities by Q2.
ohai, I’ll put a little econometric spin on it. When you’re trying to do something in macro like identify supply or demand shocks, a common technique is a SVAR (structural vector autoregression). The insight I’d bring from that over here is that if you want to understand why the S&P 500 and oil are moving together or not, you can think of them instead each as a combination of two uncorrelated structural shocks: one that represents the market and one that is basically the residual from regressing oil returns on the market.
If you look at daily data since 2005, then you get a beta of about 0.5 when regressing oil return on S&P 500. This means that the strong gains in the S&P 500 during parts of this year would likely have made oil look better. However, compared to the end of Q2, the S&P 500 is close to flat, while oil is down roughly 50% (as of yesterday at least).
You can reverse it and do something like regressing the S&P 500 on the S&P 500 energy (beta of around 0.6) (since I don’t have easy access to an S&P 500 index ex energy). If you look since the end of Q2, it has rallied pretty strongly. In other words, if you owned the S&P 500 and went short 60% of the S&P 500 energy index, you’d probably be outperforming quite a bit now (though it would have been a shit strategy since 2005).
So Oil is down 3.24% today while the Dow is up 2.43%. Why?
Because we are in a policy driven market and fed policy trumps pretty much everything else.
So there’s this thing called the Fed CFAvsMBA. And they have this thing called the target rate…
^ But a few posts up you said that if someone were to tell you oil would drop, you would have correctly predicted that equities would drop?
All else equal, obviously oil isn’t the only factor capable of moving markets. At this point you’re just being a pedantic retard, have fun with that.
http://www.businessinsider.com/howard-marks-on-oil-2014-12
in simple terms. oil prices are a stabilizer to supply and demand. ie low oil prices lead to higher prices. in addition they talk crap about forecasters.
Now you’re just calling me names. I said earlier that no one knows why the market is dropping with oil and the mouth pieces on TV just say ish that seems to sound good to most ears. It keeps viewers glued to the TV and the TV station gets to charge more for advertising. I openly admitted that markets move randomly and no sure cause/effect relationship really exists. If it did, a formula for riches would have been created long ago. Earlier I was called ignorant for this statement and you had mentioned that if someone told you oil went down, you would have rightly concluded that equities would follow. Yesterday the opposit happened. So which is it? Is this time different than last week? Is the market random in the short term? Or are you perhaps maybe incorrect?
^If you looked at the energy sector as an aggregate, most of the appreciation was derived from a short squeeze… In addition, my grandmother gave a speech labeling this period as transitory, and thus since markets move (in theory that is) 6 months + in advance of actual events, it would explain the divergence. I think as a group we can agree short term movements may not be able to be predicted, but we are a unit paid to forecast and profit from long term planning.
Multiple factors move markets. I never said it was a single factor model. But all else constant, in this environment markets move with oil prices. In the longer term after losses are absorbed within the energy and related industries or with smaller more palateable movements I could see the relationship changing. However, there are other factors and a fed policy at odds with market expectations can obviously have a big effect.
If it helps at all, I moved my 401k to cash two weeks ago anticipating that falling oil would continue to drag down markets. At close last friday, I went to midcaps anticipating the fed would keep rates low given global uncertainty and below target inflation and that would drive markets up. On both counts it worked out, and not because of randomness. Your point about a model generating wealth is not related in any way to my point about contemporaneous relationships because that would require the ability to forecast the drivers such as fuel price movements or Fed suprises, which despite my recent success is largely impossible (and I’ve stated as much from the beginning). Unfortunatly I don’t think you understand the difference between a contemporaneous relationship (valid) and a time series relationship (none exists so you can’t forecast) so I’m mostly just wasting my time.
^ Thanks. No beef son.
just my .02:
The headlines will read deflation because that is the immediate impact felt.
But consistently low oil prices put the US Dollar in danger of inflation. Because global oil sales are denominated in US Dollars (petrodollars) the number of dollars needed to support this system falls with the price of oil (because quantity demand of oil is nearly inelastic). The greater the oversupply of dollars than acutal demand for them, the greater the inflation rate… right?
And maybe I’m just too much of a conspiracy theorist, but I think all this nonsense in the Middle East, Russia, oil prices, US Dollar, etc are all intertwined and every player is trying to strategically gain one up on the other. The US Govt/Fed has manipulated the oil and currency markets in an attempt to destroy Russia.
Feel free now to criticize my independent thinking…
It feels like the day after the FOMC meeting, by the PM session, the market had really stopped caring about, and mirroring, oil movements.
Back to bull-market business as usual, it’s up up up kids! On track for a new S&P500 high next week.
It will be interesting to see what happens if oil goes into free-fall again. Is the market less concerned now as they view it as a net positive for the US (questionable that it is), or will they freak out again? I think reactions will be more rational and controlled next time, people have had time to process and accept $40 could happen.
Ha ha, good ol’ Black Swan. I’m still amazed people still try to have discussions with him when they differ. Seems like every conversation is a fight. But I figured people would be interested in The Man, The Legend’s point of view on all this. Price Agnostic all day 'erday son!
Musings on Markets: The Oil Price Shock: Primary, Secondary and Collateral Effects
http://aswathdamodaran.blogspot.com/2014/12/the-oil-price-shock-primary-secondary.html?m=1