Charles Hugh Smith | Oct 12, 2014 12:24AM ET
If oil has been leading the broad markets lower, should it find support at $84 and reverse, that could presage a reversal in the broader market.
Did the sharp sell-off in oil trigger the meltdown in stocks? While there are plenty of potential reasons for the stock market to drop--stretched valuations, the slowdown in Germany, Japan and China, etc.--it occurred to me that the recent sell-off in crude oil might have served as a trigger.
Any sell-off in a sector that represents a significant share of the stock market has the potential to trigger more selling, which then begets more selling. Energy is a sector that is generally well-represented in institutional holdings and mutual funds.
Once oil broke key supports, institutional money managers reading projections of $60/barrel oil apparently decided to exit oil and oil services en masse.
Given the weight of this sector in portfolios, mass unloading of oil stocks would negatively impact the entire S&P 500. If oil being dumped caused the market to breach key technical levels, that would cause managers to trim risk-on portfolios. This selling would then beget more selling as the downtrend gathered momentum.
We can look for some correlation by comparing the charts of WTIC (crude oil) and SPX (S&P 500). Oil topped in June and rolled over into a downturn that gathered momentum once the 50-day moving average (breached in early July) and 200-day moving average (breached at the end of July) gave way.
An attempted reversal in crude oil failed in late September, ushering in a brutal $10 cascade down to the $84 level.
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