Does Oil Still Matter?

S&P500 daily at end of day

End of Day Update:

Stocks slogged through most of the day in the red, taken down by a huge drop in oil prices. A late-day rally shook off the early doldrums, pushing us into the green, but that was short-lived as a last-minute headline out of Europe sent the market tumbling into the close.

As dramatic as that sounds, the day was a fairly benign relatively speaking. The market traded sideways, mostly staying between 2,040 and 2,050. This compares favorably to the massive swings we’ve seen in recent sessions.

With oil down as much as 9%, it was constructive to see the market slip only a fraction of a percent. That shows a big chunk of the oil story is already priced in. Anyone afraid of plunging oil prices sold weeks ago, and is why today’s oil dip didn’t concern current owners much. In fact, it was quite bullish to see the market break into the green toward the end of the day. That is, until the ECB rained on our parade.

Without getting too technical, the ECB decided to play hardball with Greece’s newly elected, anti-austerity leaders. This high-stakes game of chicken roiled markets in the final minutes. But the question we have to ask is if Greece still matters? We’ve been down this road before. Back then numerous financial institutions were vulnerable to a Greek default, but this time it is less of a surprise and the bulk of Greek debt is held by governments. While German taxpayers won’t be happy, at least this time it shouldn’t threaten to seize European banking flows.

But that kind of thinking uses logic, not the market’s strong suit in uncertain times. This afternoon’s sell-first, ask-questions-later later mentality could send prices careening dramatically lower Thursday. But at the same time, many traders who lived through multiple Greek crises could see this as just another Red Herring trying to get them to sell their stocks for a discount. Fool me once, shame on you; fool me twice, shame on me. It will be interesting to see which mindset traders show up with Thursday morning. So far overnight futures are down modestly, suggesting the Greek story is not spiraling out of control.

Technically, the market struggled with 2,050 resistance the last two days. Look for a surge of breakout buying and short-covering if we get through this level. That should push us to 2,060, which will be a far larger test of this young rebound since that is where we stalled multiple times in January. On the downside, be wary of an inability to reclaim the 50dma and 2,050. If the market cannot keep recent gains and slips under 2,020, then we will most like continue sliding through the 200dma.

Jani