“I Told You So!” Moment: Oil-Stocks Correlation Breakdown

Great graphic from Bespoke Investment

Bespoke Invest writes,

As shown, the correlation between the stock market and oil remained positive up until just recently, but the breakup between the two has been swift and extreme. At the moment, the one-month correlation between the two stands at -0.70.

As to whether US stocks will continue to fall as oil prices move higher or if the current retracement can be interpreted as just as a normal correction has yet to be determined or resolved.

Putting on too much emphasis on the present action of the US equity markets could mislead because these markets seem to be digesting on new information or simply undergoing a normal profit-taking environment. Remember, no trend moves in a straight line.

Bottom line: the oil-equity causal relationship can't be read as a reliable indicator.

Cognitive Dissonance: Associating MENA Political Crisis Or Oil Prices With Weak EM Equities

Listening to media and to their “experts” or to mainstream chitchats will give you a false impression of what’s been happening.

Some would claim the Middle East has been causing market turmoil.

On the other hand, others will claim rising oil prices has hurt the EM equity markets.

Let’s put into perspective the reality of the current situation as seen by the above chart. (pls pay close heed)

By the way, here is the time line of the MENA’s (Middle East and North Africa) revolt against autocracy.

The best view for this interactive chart is to go the Wall Street Journal here

The important point is to show you WHEN all these began—January 9^th. (you may want to include Algeria’s food riot 3 days earlier)

So what do all these tell us?

-The fall of emerging market equity prices began last December as OIL prices in general continued to climb. In fact, the initial downturn of EM equities coincided with the WEAKENING of oil prices. But oil reversed and rallied.

-Emerging equity markets has been on a decline WAY BEFORE the domino like political crisis in the Middle East and Africa (marked by the blue vertical line).

-Oil prices have been on the rise WAY BEFORE the MENA Political crisis

-The US S&P 500 has been on a winning streak and only materially declined yesterday.

So has rising oil prices and or the Middle East crisis has caused the decline in EEM? The answer is clearly NO!

The correlationship of the Middle East crisis, oil and Emerging markets appear to be tenuous, i.e. correlations have been starkly weak.

Yet to argue that Middle East or High Oil Prices equals WEAK global equities is no more than cognitive dissonance or in my terminology popular “superstitions” or in Taleb’s lingo, “Negative Knowledge”.

People are simply trying to grope for an explanation and would take any events to confirm or to read by the market’s action.

Instead the role played by the Middle East Crisis to the current EM equity infirmities has been as an AGGRAVATING CIRCUMSTANCE to an already existing condition.

Those who took action because of the alleged Tunisia-Oil-Equity relations are plain LUCKY, for the simple reason that to argue base on this premise has been simply false.

I’d like to further add that to my observation NO EXPERT PREDICTED this MENA political crisis to happen or unfold as it has today.

While the MENA crisis has been long overdue, and has been predictable, as current political structures and system are simply unsustainable, what has been unforeseen is the timing and the scale of contagion.

Take for instance, Dr. Marc Faber, as previously pointed out, rightly predicted on the weakening of the emerging market stocks in the end of 2010. But he didn’t foresee this political crisis unfold (although his prediction of an Israel-US air strike on Iran since has not materialized. Generally speaking, he’s been spot on).

So current conditions have only coincided or buttressed Dr. Marc Faber’s general perspective of the weakening of emerging market equities.

Bottom line: the MENA crisis serves only an aggravating circumstance, not the cause of weakening EM equities.

I’d like to add that MENA political crisis is an upheaval against dictatorship regimes whom had been US puppets.

Yet violence is likely to remain local, as the incumbent autocracy will stubbornly resist relinquishing power which they see as an endowed entitlement.

Nevertheless, it is a positive outlook to see people start to be appreciative of freedom or liberty, even if many have misplaced ideas about what constitutes genuine liberty.

In watching a live interview broadcast in Aljazzera, two Middle East experts seem to acquiesce on the root of the unrest: economics—where the current system has only channelled wealth redistribution to the privileged political class at the cost of the public.

However, in contrast to common impression about Islam Dr. Mark LeVine says that he’s been amazed by how Islam authorities have been urging people to revolt peacefully in spite of government actions.

So while there may be some risks of a militant Islam theocracy taking over, he thinks that this may be overrated.

I agree, people are starting to learn about the difference between top-down and bottom up political structures. Thus, this is no reason to be bearish.

Note: People believe whatever they want to, some to the point of deluding themselves.

I am interested in positive knowledge or what works. This means reading through all the facts rather than selectively taking in facts that only conforms to a preconceived conclusion.