Financials & Oil Continue to Diverge

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Includes: USO, XLF
by: David Enke

As seen in the chart below, financials (represented here by the (NYSEARCA:XLF)) and crude oil (represented here by the (NYSEARCA:USO)) continue to diverge.

Source: BigCharts.com (1 year, daily)


Source: BigCharts.com (6 months, daily)

 

There have been numerous explanations for the recent move in financials (new SEC requirements generating a short squeeze, oversold stocks, reported numbers not as bad as expected for select financials, etc.), but I suspect that the recent sell-off in crude oil also has a lot to do with the short-term price action in the financials. The chart below shows the recent 10 day, 15 minute price performance of both the USO and XLF. Again, the divergence between the two, in particular the price action around sharp sell-offs in the USO, is of interest.

 

Source: BigCharts.com (10 day, 15 minute)


While a simple chart comparison, I suspect that until the market has confidence that recent credit problems and sell-offs in housing are corrected, the price action in crude oil will continue to affect the performance of the financials, and the market in general. The financials have had a nice move over the last week, housing is still weak, the Fed is in a box regarding rates, the crude oil supply-demand balance still remains tight, and hurricane season has begun in earnest. Each points to continued interesting times for both crude oil and the financials.

The impact of crude oil on the dollar, inflation, and interest rates also can not be ignored. While crude seems to be looking for reasons to sell-off in the last week, I don't expect this trend to hold for long, nor do I expect the market to quit following crude oil movements as long as we stay around these current historically high levels.

Disclosure: None