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Financials & Oil Continue to Diverge

by: David Enke July 23, 2008 | about stocks: USO / XLF    

David Enke

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As seen in the chart below, financials (represented here by the (XLF)) and crude oil (represented here by the (USO)) continue to diverge.

Source: BigCharts.com (1 year, daily)


Source: BigCharts.com (6 months, daily)

 

There have been numerous explanations for the recent move in financials (new SEC requirements generating a short squeeze, oversold stocks, reported numbers not as bad as expected for select financials, etc.), but I suspect that the recent sell-off in crude oil also has a lot to do with the short-term price action in the financials. The chart below shows the recent 10 day, 15 minute price performance of both the USO and XLF. Again, the divergence between the two, in particular the price action around sharp sell-offs in the USO, is of interest.

 

Source: BigCharts.com (10 day, 15 minute)


While a simple chart comparison, I suspect that until the market has confidence that recent credit problems and sell-offs in housing are corrected, the price action in crude oil will continue to affect the performance of the financials, and the market in general. The financials have had a nice move over the last week, housing is still weak, the Fed is in a box regarding rates, the crude oil supply-demand balance still remains tight, and hurricane season has begun in earnest. Each points to continued interesting times for both crude oil and the financials.

The impact of crude oil on the dollar, inflation, and interest rates also can not be ignored. While crude seems to be looking for reasons to sell-off in the last week, I don't expect this trend to hold for long, nor do I expect the market to quit following crude oil movements as long as we stay around these current historically high levels.

Disclosure: None

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This article has 3 comments:

  •  
    Jul 23 07:03 AM
    This is simply sector rotation that started early last week - dumping the hugely overbought commodities and oils and into a sector that was just torn to bits, the financials.
    Reply
  •  
    Jul 23 09:56 AM
    There has been a rotation: the yen carry traders sold oil, and this prompted a sell off in the energy shares. They bought housing, financial, consumer services, retail, real estate, private equity, preferred and mortgage REITS. Yet this "rally of the dogs" will soon be over. In the linked article, I remark that oil is volatile now for me to trade, I recommend that one day-by-day, dollar cost average invest in gold; the gold to oil ratio is turning around -- gold is now becoming more valueable than oil.
    Reply
  •  
    Jul 23 01:02 PM
    I would like to throw this into the mix, from Ted Butler ( www.investmentrarities.../ )

    "As a result of the closer scrutiny, the CFTC suddenly "discovered" that a very large trader in crude oil needed to be reclassified from the commercial category to the non-commercial category because the position that this trader held did not represent a bona fide hedge and was, therefore, a speculative position.

    What was shocking about this position is its size. This one trader held a spread position of 147.000 contracts in NYMEX crude oil futures and a spread position of 326,000 contracts in futures and options combined, a position of more than 10% of both the entire futures market and futures and options combined. While this percentage of concentration does not come close to the concentrations in silver or gold, it was still largely unknown that one trader held such a large position in crude oil, even if it was a spread position (being long and short different contract months simultaneously.

    Of course, the CFTC did not identify this trader by name, as that is contrary to current law (why, I am not sure), but the Commission clearly revealed the trader by size. To give you some perspective of the size of this trader’s futures only position, in the non-commercial spread category to which the position was reclassified, this single trader holds a position more than 90 times as large as the average trader in this category (147,000 contracts vs. an average spread position of 1,630 contracts). How could such a dominant position not control spread price changes?"

    Is the current drop in the price of oil an economic drop - or a manipulated drop? Let's see, who would like to cause a drop in oil's price and have the means to do it? Could it possibly be a government that is bankrupt, and doesn't want a collapse of the economy on its watch? Who would benefit the most from staving off the inevitable?


    Hmmmmmmmmmmmmm
    Reply
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