Tuesday, September 1, 2015

Economy: Stocks & Oil - Alternate Universes?

(Drivebycuriosity) - Physicists are speculating: Are there more universes besides our universe, are there alternate universes or parallel worlds? It looks like that the financial markets are confirming the parallel worlds thesis, at least there are two very conflicting movements at the moment.

The Stock markets dropped in the recent 8 days about 10%. If we believe Bloomberg, Reuters and other media stocks are falling because of worries about the global economy and the slowing Chinese economy. But in the same time the price of oil climbed around 16% (Brent Crude jumped from $42 to $49 today  trading  crude). Are stocks and oil parts of alternate universes?

If the stock market is right and the global economy is indeed worsening, than the commodity, which is already over-supplied, would meet a shrinking demand (especially from China) and the oil price has to fall deeper. How can oil and stocks differ so much?

I suppose that stocks and oil follow the sentiment and the herding behavior of the hedge funds and other speculators. Many hedge fund manager are pessimistic and have been betting on falling stock prices for months. History shows that hedge funds have a herding behavior: They buy and sell the same stocks, at the same time, and track each other's investment strategies (herding). So the sliding stock prices provoked more stock sales which accelerated the slide.

Funds that invest in oil and other commodities show herding behavior as well, but often in the opposite direction than stocks. Many fund managers have a bias for higher oil prices, a majority believes that the oil price should rise. Minor catalysts, like reports that OPEC member Venezuela wants an OPEC meeting, started last week an oil buying stampede. More and more hedge funds and others (the herd) jumped onto the bandwagon of suddenly rising energy prices.

I suppose that both movements will end soon, stocks will rise again because the economic problems are exaggerated; and oil will fall, because only lower oil prices will solve the over supply problem. 

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