Crude's big gains threaten stocks
Posted
May 21 2008, 07:49 PM
by
Charley Blaine
A week ago, I blogged that the stock market rally from mid-March could continue for some time -- if oil prices would cooperate.
They haven't. Crude oil closed Wednesday at $133.17 a barrel, and stocks tumbled, with the Dow Jones Industrial Average falling 227 points. Things could get worse.
Here's why the stock market could test the lows of mid-March, amid the worst of the Bear Stearns crisis:
From market highs on Monday, the Standard & Poor's 500 Index is off 3.4%. The Dow is off 4.1%, and the Nasdaq Composite Index is off 4%.
On March 17, the S&P 500 dropped to as low as 1,256.98, a drop of 19% from its all-time closing high on Oct. 9. A nifty rally began off that low that saw the S&P rally as much as 14.6% when the market peaked on Monday afternoon.
Here's why things could tumble more:
Oil prices. Need I say more? Crude's big run-up shows no signs of easing, and it looks now that it is starting to force major changes in how Americans conduct their daily lives. There's more talk about mass transit. Airline executives are begging the Bush administration and Congress to re-regulate their business. Moreover, the stock market overall tends to push lower when crude moves up. With Wednesday's close, crude was up 5.5% on the week; 17.4% on the month, 31% on the quarter and 39% on the year. That's a lot of momentum. But the momentum may be getting so out of control that the market could collapse on itself.
Airlines. The airlines are facing their worst crisis since the Sept. 11, 2001 terror attacks. Perhaps Southwest Airlines may be able to turn a profit, but I'm not sure anyone else can. Wall Street doesn't either. United Airlines fell 30% on Wednesday. And, unless regulators, banks and the like start paying attention, I worry one of the majors could collapse and cause some serious disruptions. And more uncertainty. Wall Street hates uncertainty.
Consumers. The big numbers suggest that the consumer is still out there spending happily away. I don't believe it. Any gains you're seeing in consumer spending are coming from spending on gasoline. They're not buying furniture. They're not buying big cars. Ask a car dealer about the last time he sold a big SUV. CNBC's Phil LeBeau said data he's seen suggest that the used price of a mid-sized SUV has fallen more than 13% since September. A large SUV has fallen 14% in value. One auto dealer in Chicago told him recently that he won't take big SUVs as trade-ins because it will take more than two months to get rid of the vehicle.
Moving averages. Moving averages help gauge investor confidence. I pay closest attention to the 50-day and 200-day moving averages. On Monday, the S&P 500 and hte Nasdaq Composite passed through their simple 200-day moving averages in part because crude oil was lower. Then, crude rallied at the close, and the indexes fell back under their 200-day averages. Not a good sign. You can see the S&P 500 chart here and the Nasdaq chart here.
Financial stocks. Remember the credit crunch? It's still there, although not as bad as it has been. That's what the Federal Reserve said in the minutes of its April 29-30 meeting. But financial stocks, as measured by the Select SPDR Financial exchange-traded fund, have dropped nearly 12% since May 2. The Amex Securities Broker/Dealer Index, which tracks the investment banks and the like, is down 11%. The five pure financial stocks in the Dow -- American Express, Bank of America, JPMorgan Chase, Citigroup and American International Group -- are among the seven worst Dow performers this month. A note from The New York Times' Floyd Norris shows how weak financial stocks have become. Tuesday, the market cap of the technology sector of the S&P 500 exceeded the market cap of the financial sector for the first time since the early part of the decade. Techs were 16.3% of the S&PO 500's market cap, followed by financials at 16.2% and energy at 14.9%.
Interest rates. The Fed clearly signaled today that inflation is becoming a big concern. So, don't expect more rate cuts anytime soon. If anything, the pundits say, interest rates could move higher. That was a big and ironic reason for Wednesday's stock market tumble. The irony was that, for weeks, the chatter around Wall Street has been that, if the Fed did anything, it would raise rates. Now the Fed has spoken, and Wall Street is mad at the central bank.
I confess that I've been thinking a lot of about oil. Here's what I said after Goldman Sachs predicted crude oil could hit $150 to $200 a barrel in six to 24 months.
Want more on crude's move and today's market? Check here:
