Oil Drop, Rebalance & Quad Witch
While stocks are likely to face a lively Friday with another drop in oil prices and fallout from the downgrade of corporate bonds, they also face two quarterly housekeeping events sure to bring added volatility.
By Vikram Rangala
Friday, December 18, 2015
Remember that time the Fed raised interest rates after seven years of virtual zero borrowing costs and the economy somehow managed not to collapse and stocks rallied with optimism about continued job growth and steady price and wage increases? That was yesterday’s news.
No, really, that was actually still yesterday’s news, despite Thursday’s 40-point drop in the S&P 500. (Today’s news is Star Wars.) The market was supposedly giving its approval to the rate hike. Until yesterday it wasn’t. And today it seems to still be disapproving, at least according to those who believe that market moves are some kind of economic commentary.
The fact is they usually are not. It’s the end of the year, next week is Christmas, and Monday of this week was the end of Hanukkah. While oil and junk bonds will still be a factor, once funds and other investors divest themselves of that risk, they won’t be as much of a factor.
In fact, we may be seeing the end of the era in which petroleum has such a huge effect on the stock market. Carbon taxes and carbon markets are finally getting the kind of acceptance that makes them inevitable. When Pres. Obama, Elon Musk, Exxon Mobil CEO Rex Tillerson, and half a dozen major fossil fuel companies all want one, it’s going to happen.
Add to that the ever-dropping cost of solar panels and the more efficient models of financing large-scale solar installations and the world is getting close to the time when Big Solar has as much money and clout as Big Oil. We still have hurdles, though, like the town council of Woodland, North Carolina, who voted to deny permission for the building of a solar farm, which would have brought cheap electricity and jobs.
The reason? Citizens believe the solar farm will suck up all the Sun’s energy, not just what falls on the panels, stop photosynthesis in the plants, and somehow cause cancer. They really do. Years of miseducation by oil companies has worked, apparently, and solar energy companies will have to undo that and prove that they are not going to plunge us into darkness.
Meanwhile, the real reason that stocks may drop further is none of these things. People are just taking their money and going home for the holidays.
Ross Yarrow, director of U.S. equities at Robert W. Baird & Co. in London, told Bloomberg, “Now the focus goes back to all the things to be worried about in 2016. There’s no huge reason for people to be putting money to work between now and the end of the year.” With the Fed hike over, everything that could happen to make risk worth taking has happened. The only thing left is unexpected surprises. So people are getting out.
Today, they’re getting out in two additional ways. First, there’s quadruple witching, an end-of-quarter day when futures and options contracts on stocks and stock indices expire and traders tally profits and losses. Second, there’s the quarterly rebalance, which is really two rebalances.
The first is the official rebalance, when the operator of the S&P 500 rebalances the weighting of different stocks in the index to more accurately reflect how much of each stock is being held. The other is what individual funds do. Like anyone else, they will add to winners and get out of losers as best they can. They want their quarterly reports to look good.
Right now, among the losers are energy and mining companies weighed down by a strong dollar and oil prices which look as though they have not yet hit bottom and may never go above $50 again.
So when you read that oil is dragging stocks down, that’s only sort of true. What’s dragging stocks down is the selling of losing and underperforming equities. This quarter, they happen to be oil-related. Among the winners, which are getting bought heavily, are Tesla and Solar City, which rose so much on Wednesday that Elon Musk alone made $770 million.
Does that mean the market loves Elon Musk and no longer loves Rex Tillerson or loves solar and doesn’t love oil? No, the market loves money. And they are doing some adjustments before the holidays to put their money where the money is.
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