A Greek Default Would Put More Negative Pressure On Oil Than The S&P 500

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Includes: FMCC, FNMA, OIL, SPY
by: Harold Fredrick

History doesn’t always repeat itself, but it often rhymes. The sudden, historic drop in the price of oil during the apex of the U.S. financial crisis may help us understand how the likely apex of the European financial crisis, a Greek default and subsequent domino effect (94% probability), might affect the price of oil as compared to the S&P.

Oil prices reached a historic high in July 2008 after posting an incredible 125% increase over the previous 2 calendar years. However, prices began to fall dramatically after the federal seizure of IndyMac , the first of 4 cataclysmic financial events that took place during Q3 2008. From the seizure of IndyMac to the seizure of WaMu in late September, oil would give up nearly half of its 2 year gains while the S&P would only retreat 10%.


(Click to enlarge)

Notable Events, Q3 2008:

July 11: Federal regulators size IndyMac
Sept 7: Government seizes Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC)
Sept 15: Lehman files for bankruptcy
Sept 25: FDIC Seizes WaMu

Not only is there historic precedent for a Greek default putting more downward pressure on oil than the S&P, there are two other reasons why crude would likely take it on the chin worse than the stock market: 1) The financial crisis is on foreign soil this time. 2) The exit from the euro and subsequent flock to the dollar, the currency in which crude is priced, would put even greater negative pressure on oil.

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