Why has the broad market struggled to break higher over the past seven or eight sessions? Is it due to technical reasons (v-shaped bounce off of 1249 on the S&P 500 into overhead supply at around 1332)? Is it because of the recent spike in the price of crude oil? Because the ECB raised rates? Because Japan has a major earthquake every week now? Because of continued tensions in the Middle East and Africa? Or maybe because every single major hedge fund manager in Greenwich and Manhattan were all served with divorce papers last week, putting them in a sour mood?
The financial news media love to assign a daily narrative to price action in the markets, but the struggle between correlation and causation on Wall Street will be an omnipresent one. We are dealing with the aggregate human emotions of millions of market participants on a daily basis, and trying to pinpoint exactly why the market is up or down on a given day usually amounts to nothing more than witty banter, at best, and money-losing hubris, at worst. Obviously, the job of the financial media is to report on the markets, but as a trader you have to constantly fight the urge to simply acquiesce to their reasoning.
In the case of crude oil, there has been plenty of speculation (pun intended) about the precise “tipping point,” where crude become so expensive that equities can no longer ignore its negative impacts on consumers and most businesses. I wrote a post last week where I said that $120 seemed to be a line in the sand, but the reality is that I will let the price action dictate to me what that tipping point actually is.
Going back to 2008, we can pretty clearly see that equities, particularly energy stocks. stalled out and rolled over weeks (in some cases months) before crude topped out at $147 a barrel. I can vividly recall traders aggressively buying energy stocks to no avail, as crude mached higher on a daily basis amid CNBC’s “Black Gold” banner on the top of the screen, following crude’s tick-by-tick fluctuations. Indeed, those traders who bought energy stocks simply because crude was going higher were in for a rude awakening over the next few months, especially if they did not have the discipline to cut losses.
The bottom line is that Mr. Market is the ultimate arbiter, and if you ignore his messages then you are doing your portfolio a disservice. A rising crude oil price is no reason to suddenly metamorphosize from a trader into a macroeconomic expert, or worse yet, an economist.