Last week ended with a blistering rally in risk assets with most stock markets getting a 2%+ pop in very short order, and this week opened as if that theme of strength might continue. But that was a short-lived prospect as risk aversion took center stage once again during the overnight session. This was coupled with a drop in Oil, so many news outlets right are connecting those dots and alluding to stocks being lower because Oil has sold off again after last week’s 12% rip off of the lows. If you want to get in-depth behind what’s going on with Oil prices, myself and Christopher Vecchio produced a special report on this topic that was released this weekend.

Old Support, New Resistance on USOil

Created with Marketscope/Trading Station II; prepared by James Stanley

Be careful with that type of narrative right now; because tensions are still high and the potential for huge volatility (in both directions) still exists. This is what often happens at major market turns as new bears and old bulls slug it out to see who is going to control price action moving forward. Likely, there is some impact to stocks with Oil selling off further. We’ve been discussing how Oil has a leading component for stocks, especially US stocks, for the better part of three months now. For years this relationship was reversed, where lower oil prices were actually thought to be a stimulus for the US economy, given the fact that much of the oil being used was imported into the economy. But the Shale revolution in the United States coupled with six years of ZIRP driving investment flows into new technology has changed all of that, as the US has actually become an exporter of Oil. As we mentioned back in October, the fact that the United States is a net producer in Oil now versus a new consumer, lower Oil prices would likely hit US stocks.

But this type of transmission takes time, as it’s the quarterly reporting of companies with energy exposure that will likely be the bearish factor to drive stock prices lower on this theme. And we’ve seen some of this already, but the big movements in Oil have been since June 24th of last year with a hastening in the trend over the past three months as Oil has fallen from the $50-neighborhood all the way to sub-$30. So the coming quarters will likely be unkind to American corporate earnings as the impact of these dramatically lower Oil prices make their way into energy producers’ numbers, and it would be logical to expect investors to begin pricing this in ahead of time under the same expectation that we just shared with you; but it’s unlikely that this fear has been fully priced-in just yet, because there is another factor keeping hopes (and stock prices) from falling further.