Oil has suddenly, once again, become a huge quandary when we try to figure out the direction of the overall market. We know that, for months now -- perhaps even this entire year -- hedge funds that trade on relationships between commodities and stocks have sold stocks whenever oil has broken down.
The reasoning behind that trade is pretty simple: If oil is going down then the economy is not strong enough to go up on its own, so if the Fed tightens, we will be right back in the soup. This is the "oil as barometer of strength/weakness" dichotomy that kicks in every time oil goes below $45 -- as it is right now.
I have always thought this a tad wrongheaded, because the vast majority of the companies in the S&P 500, close to 85%, are inversely correlated to the price of oil -- meaning their earnings go up if oil goes down. So, the counterintuitive nature of the averages going lower when oil goes lower should not be lost on you, even though it is clearly lost on the vast majority of big-time traders, out there.
Here's the issue, though. When you see outfits like Macy's (M) crash right before your eyes, and you know that the Macy's shopper benefits from lower gasoline prices, you really get thrown off. One of the great undercurrents of this moment is that lower gasoline will translate into higher purchasing power. But the decline in Macy's earnings says, "Not so fast, the decline isn't equaling additional sales."
That's what made yesterday so jarring. Oil going higher may help in the world of stocks, but we know it is bad in the real world. Yesterday, we saw that oil going down hurt the world of stocks, and, when looking through the prism of Macy's, didn't help in the real world, either.
A plague on both stock and real-world houses.
Worse, yet, the saving grace of oil had been the possibility that the winners, those with good balance sheets and lots of liquidity, would start buying up the losers. The deal on everyone's lips was that Exxon Mobil (XOM) would buy Anadarko Petroleum (APC) now that the Macondo claims are behind it. The claims had acted like a poison pill for this great exploration and production company, and now that they are resolved, there were lots of reports that Exxon would make a move.
Instead, we learned in one 36-hour news cycle that Anadarko had approached Apache (APA) with an all-stock bid, causing Apache's stock to soar on the leak while Anadarko's got hammered. Then Apache vetoed the bid and Anadarko felt compelled to issue a release saying such.
The result? Apache's stock, which had spiked, got crushed and Anadarko's stock after rallying momentarily, got blasted down anyway.
So not only did we lose the commodity bid underneath, yesterday, we also lost the takeover story that had kept things percolating. (For a full list of what might be taken over next, see my video with Dan Dicker yesterday).
Now we are in the difficult position of not gaining from oil weakness through retail earnings, and not gaining from oil takeovers through crude weakness. Both were part of the pall cast over the entire market.
What happens now? What do we want? Bulls are back in the ridiculous place of wanting to see oil go higher -- especially if it doesn't even seem to be helping anyone that it's lower, and definitely hinders all of the companies that have come public that are related to the oil boom.
Unfortunately, the economy doesn't seem strong enough to take oil higher, and we are still getting increased volume from Saudi Arabia, Iraq and, soon, Iran. Plus, it looks like ISIS, which could always be a geopolitical disrupter, might be on the run because of Russian and Kurdish fighters.
You add it all up and it becomes part of the bear case, not the bull case, and it only exacerbates fears that the Fed will tighten and send us back into the abyss of no growth whatsoever.