Why Falling Oil Prices Aren't Boosting Equities

Jun 24, 2022

Vijay Bhambwani, Editor, Fast Profits Daily

There is a negative corelation between crude oil and equities. By that I mean, when crude oil goes down, stocks go up and vice versa.

Well, crude oil prices have been falling. So why aren't stock prices rising?

In this video I'll explain what's really going on.

Watch the video and let me know your thoughts. I love to hear from you.

Hello friends. This is Vijay Bhambwani and I have been trading these markets since 1986 and through my videos, I want to help out and reach out to fellow like-minded traders so that they can deploy their money more efficiently, earn higher trading and investments profits, and churn their capital around faster so that their annual P&L is a whole lot better.

Now, the video that I have recorded is actually an idea that I got from my late night swims in my club. You see, we hang around with friends and men will be men. We talk about money, we talk about investments, we talk about markets. And the one question that I am often asked of late is oil and gas prices are falling, so why are equity markets not going up?

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This is because falling oil prices are actually helping ease inflationary pressures and therefore should be negatively correlated with equity markets and that is a fact. It's an established fact. Lower oil prices should hypothetically be pushing equity markets higher. So less dive right into why it's not really happening.

You see, the intermarket analysis, intermarket analysis is the impact of commodities on equities or foreign exchange on commodities or bonds on equities and foreign exchange, the permutations and combinations are endless, but the fact is that each asset class does have pull-push impact on the other asset classes.

The one fatal mistake that the engineers of the Titanic made was that they thought they could make these are hermetically sealable stainless steel doors in the Titanic, which, if they were shut, would make the ship unsinkable. They did not factor in the fact that the flow of water cannot be really controlled by making a few doors.

So also is money. Money is completely fungible. It moves from one asset class to the other. Wherever it feels is getting higher rate of return or a potential higher profits, it will definitely going there. So now what has happened is that oil prices are coming down because number one, people get used to bad news.

Do remember 2014, when the ISIS used to put up videos of beheadings on camera. Initially, whenever a video would come, stock markets would fall, oil prices would go up, the dollar would go up, gold would go up because of safe haven buying but over a period of time, guys started to get used to it and the impact started to get blunted.

So the Ukraine war is something that is now getting factored into the collective mindsets of traders and oil and gas prices are coming down. I have recorded ample videos in this playlist, where I have debunked the supercycle theory in both metals as well as energy.

I have a laid out my thoughts, of course, you can feel free to disagree here, that these are artificially created shortages and there is abundant supply of natural gas and even oil for that matter, and over a period of time, prices will come down.

The Ukraine war put in a 25-30% a geopolitical premium into the price but for which you will not have seen these levels. The aspect of the war is that it has created a huge amount of supply disruptions, and that is not something that people are factoring into before saying, hey, oil prices are coming down, so equity should jump up immediately.

Well, the fact that there is a negative correlation in prices is undeniable. It's a mathematical postulate. What are postulates? Postulates are some things that you need not verify. It is bright in day time. It is dark in the night time. These are mathematical postulates. They don't need confirmation.

So negative correlation between oil and equity prices are postulate. But does it really happen immediately or there is a lag effect? That is something you need to discuss. I am one of those who believes that the benefit of lower oil prices to equity markets will come with a lag effect. Why is that lag effect?

Now here I would like to get into my 360 degree worldview style of analysing the financial markets. Do remember what I told you about the Titanic barely a couple of minutes ago. You cannot stop the flow of money by making a few stainless steel doors.

So here is what really happens. Think of yourself as a multiple asset class investor, trader, or player call it what you want. On one hand, you have exposure into equities on the other hand, you're taking some amount of exposure and commodities.

You may also be diversifying some amount of money into the bond market. And you know, I am a big fan of sovereign investments. I have recorded a lot of videos on the retail direct scheme access where you can buy and sell bonds without commission directly from banks. You may also have deployed some exposure in the currency derivative segment on the NSE or any other exchange, the BSE for that matter.

What really happens when you suffer crippling losses in one asset class? Now you have to put yourself in the other guy's shoe. You have to apply your mind because I've always told you in my videos two things. Number one, we are brain warriors. We win and lose in the markets with our brains, with our ideas. Number two, nothing happens in the financial markets without a reason, and since these are financial markets, the reason has to be financial.

What really happens when a trader suffers a crippling loss in one asset class? Take, for example, commodities. You thought the war would go on and on and on, and you went long in oil prices in the recent times, and I'm recording this video on a Wednesday evening, 22nd of June, you have already seen natural gas prices come off 14 and 15% in one single trading session.

Now, if you think that's easy to trade because natural gas on an average fluctuates between 2-2.5% on a regular day, when it starts to fluctuate 15% in a day, traders get wiped out. They get killed. Now, a lot of people have lost money on those days and natural gas has fluctuated 7, 8, 10% many a times after the war has kicked off but 15% was the limit.

Crude oil prices are regularly fluctuating 4, 5, and 6% intraday. Now that is also crippling. So obviously a lot of traders would have lost money. What does an average trader do when he loses in one asset class?

He folds up the trade, pays the mark to market or whatever the actual loss is, and psychologically feels tremendous amount of distress. And that distress is basically leads to unwinding his positions in other asset classes.

This is called the domino effect, the ripple effect, call it what you want. Throw a stone in a pond. You will see that the waves will spread out like ripples from the centre point. This is precisely what is happening right now in the financial markets.

Now because commodity markets are falling, traders have lost money. They are booking losses in equities, which were also falling, and that is resulting in trades getting squared off in the forex markets, and that is impacting bond prices because do remember that at the end of the day, all asset classes are married to each other. They are in bed with each other, and you cannot say that the impact of one asset class will be limited to that particular market only.

The engineers of the Titanic realised their folly only after the ship sank. But you, as a savvy investor, trader should not make that mistake again and know that the ripple effect is what is going on in the market.

When will equity markets bottom out and start rising? When the bleeding in other asset classes either slows down considerably, or maybe stops. That is when a trader basically stops panicking, stops pulling money out of all the markets, and he says, okay, let me go back to equities, which I'm most familiar with because other diversification haven't really paid me off very well, and it takes a little while for your nerves to get calmer and redeploy of cash into financial assets in equity.

That is, my friends, the behavioural aspect of why the markets are unlikely to bottom out any time soon and jump like a V-shaped recovery that people are talking about. Yes, I repeat, yes, there is a negative correlation between oil prices and equities. If oil is down, equities should go up but like I just explained to you, there will be a lag effect. It will take a little while for the benefits to come, but they will come.

On this optimistic note, I bid goodbye to you, not before reminding you to click like on this video, if you agree with what you saw. Subscribe to my YouTube channel if you haven't already done so. Good, bad or ugly, I'm always looking forward to your feedback in the comments section and help me reach out to smart traders like yourself by referring my video to your family and friends.

I thank you for your patience and being with me in my video. Till we meet again in my next, this is Vijay Bhambwani signing off for now. Have a profitable day. Bye.

Warm regards,

Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst)

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