It's not oil! Forgive me, but would someone lay an OIL chart over an SPY chart and tell me how correlated they were from October 2014 to August 2015? I have OIL down about 60% and SPY up about 15%. So why such correlation now? It makes NO sense. We all know that the drop in gas prices is like a noticeable tax break for consumers and a reduced cost component for most corporations. So why have the DOW Transports gone DOWN when a huge cost component has been reduced? Obviously, traders are using oil as a proxy for global demand…as in GDP type growth…but are they grasping at straws? Oil may twitch but tell me how much different the world would be with Brent at $40/$50/$60/bbl.? Would we be BETTER OFF?
I don't think so. Yes, maybe some emerging market debt would be stabilized, maybe some energy companies and regional banks are walked off the ledge…but does it scream 'global demand on the rise' or maybe that the producers just froze production at current levels? And yet when oil goes up today, so does the market. Shall I say 'stupid,' 'media driven' or just 'fast money?' If I were a fundamentalist I'd look at the S&P trailing 12 month P/E at over 21 knowing that the average is closer to 15 and thinking a lot of data say we're in an economy that's more worthy of about a ~13. I'd look at the 10 year inflation adjusted Schiller P/E as of February 2016 and see that it's 24% over valued. I'd also note that it's in the top quintile from 21.2 to 44.2 and remember that if it falls into the next lower 4th quintile, it has always fallen to the bottom quintile implying a single digit P/E. But I'm a technician and guess what; unless or until we break back to new highs, I can walk on the same side of the street with the fundamentalists that are touting this market's overvaluation. Connect the lows of October 2011 with the lows of October 2014 and recent moves of retracement look like a 'move back to the broken uptrend line' that says technical damage has not been repaired and we are in a bear market until proven otherwise. We may continue to experience countertrend moves, even tradable moves, but keep your eye on Treasuries, Gold and the Dollar as 'risk off' confirmations…and the algorithms…that will give you the confidence you need in these transitory times.