A growing divergence between oil and stocks

Written July 2nd, 2013

The summer doldrums are here, regardless of last week’s volatility. For starters, no one wants to look at the markets when everyone else is out barbecuing. More importantly, there are so many diverging signals that no one wants to take large positions (e.g. do you go long Apple here or not? Will the Fed step up QE or not? Was that ISM figure positive or not?). Similarly, bonds seem to have found a bit of stability and are looking for direction. And yet, the secret is in the divergences we are starting to see.Last week, we discussed the divergence starting between gold and gold miners. Another one that’s showing up on our radar is the divergence between the stock market and oil.

Have you noticed that WTI is approaching $100 again?



Could it be that oil is about to have a strong run, at least on a relative basis?



What I do know is that the rise in oil will eventually be felt by consumers, although the impact might be slighter than in previous years, as natural gas is still under $4 (although significantly off its $2 low from 2012). Maybe inflationary, although I don’t think so on a headline scale. Maybe a picture of growth, although again, I don’t think so on a global scale.

So what’s driving oil up? Will oil come down as the USD strengthens? Why are the emerging markets continuing to crash, even ones that are oil rich? Do we start talking about inflation in needs/deflation in wants again? Is it purely an issue of the US markets being overvalued?

I’m not sure where the divergence stems from, but it’s there for the time being, and it’s worth noting. It could be anticipating increased unrest in the Middle East, inflationary pressures, or new global growth. It could be a hundred other things that in hindsight will look simple to spot or predict. For me, I’m maintaining my overweight to commodities, liking the recent bounce in our larger GDX/GDXJ position, and anticipating increased volatility in global equities.