Watch oil, it will be the key to this market as it pertains to the now-almost-sure failure of fiscal cliff negotiations.
No, I'm not kidding. Oil is the key.
During this end-of-year debate over the fiscal cliff, I have assumed correctly that the president was prepared to go over the cliff if he didn't get all he originally wanted in marginal tax rate increases and that Speaker Boehner would be unable to deliver the votes for any marginal tax increase from Republican congressmen.
Well, I might have been right, but I haven't made much money off of the prediction -- at least not so far. Because I expected us to go cliff diving, I have been short oil. I expected oil to be the most reactive indicator of the inability to get a deal done, even more so than the stock market itself. Usually oil is a terrific reactor to GDP divergences and the lack of a deal is, at least according to the CBO, worth perhaps -2% of GDP growth.
Time and the mouths of politicians have been running, but little else has been accomplished in the past two weeks. I've made almost no progress on my short position, while dipping briefly to be in sight of $84, WTI crude is now trading just below $90 even after the announcement last night of the abandonment of Boehner's Plan B.
What's going on here? There is legitimate shortage of North Sea supply that has been working to keep Brent strong and that has helped buoy WTI futures here, but I have expected the prospect of a cliff dive to have greater bearish effect. This is a symptom of the maddening year oil hedge funds, in fact all commodity hedge funds, have had trying to factor budgets and QE into commodity predictions and having little luck. Long positions in futures by non-commercials (mostly hedgies) are down to their lowest levels in 18 months, a normally bullish indicator. Yet supply reports headed into Cushing continue to swell, making 2013 look like a lousy year to bet on US oil.
With so many warring factors looming in the energy market, I was looking for the fiscal cliff debate to be the tie-breaker, pushing the third wave of bearish selling into the market and breaking it under $80.
Now I'm not so sure. But I tell you this: oil will be the key. Watch it carefully over the next few days. It will indicate whether the fiscal cliff will be just like the Mayan apocalypse, full of threat and foreboding, but passing without the slightest effect.