Stocks Scream SOS: Syria, Oil, Summers!
Bullish on stocks? The trend in oil outperformance means that you should probably be even more bullish on oil.
Seemingly out of nowhere, three new exogenous variables entered the market's equation just yesterday. News of a possible strike on Syria by the United States caused an aggressive sell-off into the close. Oil prices are spiking, which in turn has negative implications on global growth, as well as on India in particular, given its reliance on oil imports. Larry Summers appears to be the likely next Fed chairman, and concerns over a hawkish administration mean that the market must now reassess the possibility of a dramatic change to Fed policy next year.
Regarding oil, this does remain perhaps the biggest unknown in the short term. Much like interest rate movement, rising oil prices tend to be bullish and inflationary if gradual, so long as it is indicative of increased demand through economic activity. Spiking oil prices tend to serve as a deflationary shock, hurting corporate margins. We are now at a level in oil prices where there is little room for error, given historical market behavior.
Syria may serve as an accelerator to oil, which has been doing well since June. Take a look below at the price ratio of the United States Oil Fund (NYSEARCA:USO) relative to the SDPR S&P 500 ETR Trust (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/USO is outperforming (up more/down less) the denominator/SPY.
If you are bullish on stocks, then the trend in oil outperformance means that you should probably be even more bullish on oil. Ironically, that may not be bullish for stocks.
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