To be sure, this market has been all about oil recently. While there definitely have been other distractions, it has become quite clear that Wall Street’s trading machines had joined the movements of oil and stock prices at the hip. And although one could argue that the dollar and bond yields are also part of the correlation trade that has been occurring day in and day out this year, the bottom line has been that when oil went down, stocks went down, and vice versa.
But on Wednesday afternoon, it looked as though someone had flipped the switch on the correlation trade. Stocks were suddenly moving higher late in the day while oil was holding to a pretty big dive (to the tune of -8%).
Apparently none other than the Oracle of Omaha himself had provided some upbeat words about the outlook for the good ‘ol U.S. stock market.
Just like that, stocks appeared to decouple from oil.
Just like that, the S&P 500 looked like it had broken out of a long, consolidation pattern.
And just like that, the bulls appeared to be back and the bears had blown the best opportunity they had seen in a very long time.
Wait, What? Seriously?
But then it happened. With stocks at the high of the day, the S&P started to reverse. And while reversals in both directions of 5-10 points happen all the time in the stock market these days – and usually for no reason whatsoever – this reversal appeared to be different.
This bout of algo-induced selling wasn’t the usual fare. No, this one had some teeth to it. This time the S&P plummeted 10 points in just 6 minutes. And after 11 minutes, the venerable blue chip index looked like it was falling off a cliff on the chart, diving nearly 15 points. And to anyone paying attention, it was clear that something was up.
Finding the culprit for the swan dive didn’t take long. With less than 25 minutes left in Wednesday’s trading session, the ECB had decided to announce that they were no longer going to accept Greece’s debt as collateral at the bank. It looked like Mr. Draghi was looking to make a point.
Bam. Stocks forgot about Mr. Buffett and his upbeat view as the computers were trained on the headline. Remember, traders have been dealing with Greece for years now, and their computers knew exactly how to handle this type of headline. Sell. Sell. Sell.
To the humans watching the latest Greek drama unfold, the reaction was something along the lines of, “Wait, what? Seriously, we’re going to worry about Greece AGAIN?”
The Fear Was…
For anyone that was in the game during the European debt crisis of 2010-2012, Wednesday’s market tune had a familiar ring to it. Greek banks, which had already been experiencing serious outflows due to all the political chest thumping the new leaders have been doing, were now in deep doo-doo.
But the news that the ECB was suddenly joining the political arena and telling Greece’s leaders what they could do with all of their fancy new plans to swap debt, meant that there were likely going to be out-and-out runs on Greece’s banks. And as the European debt crisis play book spells out, this would undoubtedly lead to defaults, which, in turn, would lead to problems with all the European banks that had lent Greece money, which would lead to capital problems, which would lead to… well, you get the idea.
After the market closed, the fun and games continued. Before you could look up the proper spelling of the new Greek Prime Minister’s last name, U.S. stock futures had fallen another 15 points and it looked like Wall Street was going to go into full-blown panic mode. Yes, again.
But a Funny Thing Happened on the Way to the Forum
However, we awake this morning not to death and destruction in Europe and in the U.S. futures market, but to modest pullbacks in the indices across the pond and to green arrows in the U.S. indices. Instead of traders freaking out about what might happen next in Europe, they appear to be putting back the S&P points that the late-day dive took away so quickly.
Of course, it doesn’t hurt that oil is rising a bit in the early trade early. Remember, Wall Street traders DO like their correlation trades. And while Greece was definitely a distraction yesterday, it appears that things might be back to business as usual – as Greece may NOT be the word after all right now. But we shall see…
Turning to This Morning…
Greece continues to dominate the headlines this morning. However, cooler heads appear to have now prevailed as analysts suggest that the contagion effect from Greece’s banks is limited. Remember that traders have had years to identify the potential fallout from a default in Greece. The other important story in the markets remains oil. After a fairly spirited dead-cat bounce in the three days prior, crude’s rally was interrupted yesterday with an -8% pullback. According to traders, both moves may have been overdone and oil looks to be seeking an equilibrium point this morning. The key is the question of whether or not the crash in oil has now ended. And the assumption in the stock market appears to be if the decline in oil can subside, then stocks may be able to move higher. In other news, analysts expect China to continue so stimulate their economy and that the latest cut in the RRR represented the beginning of an easing phase. Here in the U.S. stock futures point to a modest gain at the open.