Is Oil Decoupling?

| About: iPath S&P (OIL)

Summary

Oil has decoupled.

Consumer confidence has peaked.

The Fed's Labor Market Conditions Index is negative.

The market had its worst start to the year in history, so it made sense that there was a mean reversion starting in February and lasting all of March. The strength of the rally has been remarkable as the Dow had its largest drawdown while ending a quarter positive ever. As you can see from the chart below, the market rebounded either because of or along with oil depending on who you ask. While it's difficult to determine which asset is the dog and which is the tail, it is clear that oil and the market were highly correlated. Recently this correlation has broken as oil has fallen sharply while the market has maintained its lofty heights.

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It's certainly difficult to determine the near-term future price action of stocks. However, the declining oil prices mean the highly indebted oil firms will be back in focus. The low $40s was never high enough to cause most frackers to break-even, but it did offer the possibility that oil could go back into the $60s and revive these firms at the brink of collapse.

The bulls certainly change their narrative a lot as I have heard that both oil prices going lower and higher were good news. The lower oil prices were supposed to help the consumer and the higher oil prices signal a strengthening economy. I believe the lower oil prices did not help the consumer, while the recent blip up was only temporary, meaning it doesn't signal anything about the economy. As you can see from the chart of consumer confidence, the survey peaked at 103.8 in early 2015. Either the lower commodity prices have had no effect on consumers or the consumers would have been in an even worse scenario if it wasn't for this benefit. Either scenario is rather bleak.

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The consumer sentiment is critical to my bearish stance. Consumer confidence on the low-end tends to move with the labor market and it moves with the stock market on the higher end as the upper middle class and rich own the majority of equities with the poor owning a minimal amount, if any.

I have a tendency to believe the labor market will begin to turn because the profit cycle is peaking. This has not been reinforced by the BLS data, but as you can see below the Fed's Labor Market Conditions Index is at the lowest point since the 2008 recession.

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Being a macro investor takes a certain clue finding ability. Searching for indicators to match a narrative become more important as a cycle matures because the recession risk heightens. The reality is the market would be back at its February lows if the Consumer Confidence data was making new cycle lows. Therefore, you have to look for clues to see where the data is likely headed to get ahead of the market. The way I look at the data, small positive sequential data points are unless the profit cycle starts to improve. I will remain skeptical of any momentary blip up in indicators.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.