.....Stuck In The Media With You

"U.S. Stocks Slip on Crude Oil, Fall Hard" - TheStreet.com
"Stocks Fall on Gushing Price of Oil" - Chicago Tribune
"Stocks Decline as Oil Prices Creep Higher" - Associated Press
"Stocks Skid on Record Oil Prices" - Seattle Times
"Stocks Sink as Oil Soars" - Business Week
"Oil at $123 Hits Wall St." - Reuters
"Stocks Retreat as Oil Prices Creep Higher" - Forbes

This is just a sampling of the headlines I saw concerning Wednesday's stock market decline. I've always been amused at how the press seems to think they can precisely explain just why the market goes up or down on a daily basis. Did oil prices rise Wednesday? Yep, by about 1.45%. Did the stock market fall? Yep, by about -1.80%. Isn't it logical to assume that the higher oil price led to the stock market decline?

To help answer that question, let's look at the stock and oil action from Tuesday (the prior day). Oil prices rallied nearly 1.5%, which just happens to be about the same percentage increase that the price of oil rallied on Wednesday. So let's check to see how much the stock market fell on Tuesday. What's this? It looks like the S&P 500 was actually UP 0.75% on Tuesday. Well, how about that? Oil prices spiked, but the stock market went up.

So, how is it that the press knows that Wednesday's oil price increase led to the stock market decline if a similar increase the day before was met by a rising stock market? The simple answer is that the press doesn't have a clue. Of course, when terrorists destroy the World Trade Center we can be pretty sure why the stock market falls. However, on the vast majority of days there are far too many variables at play to really KNOW why the stock market rose or fell.

Did some people sell stocks yesterday only because of the rising price of oil? There are many thousands of participants in the market each day. Someone out there sold solely because of the rise in oil prices. Someone else out there probably sold because the entrails of the squirrel they ran over that morning looked a bit suspicious, but we'll leave that for another article. Most market participants don't focus solely on one factor. In all my years in the investment business (including as an energy analyst), I've never had a conversation go as follows:

Ken: Hey, Doe. Anything looking interesting to you in the market these days?

Portfolio Manger Doe: Hi, Ken. Look, I've got to make this quick. Did you see that oil prices are rising 1.5% today! I've got to dump my stocks.

Ken: Ummmmmm.....ok. But we've been making new highs in the oil market pretty regularly for a while now. What's got you so lathered up today?

Doe: Don't you see it? This is a bearish increase in oil! It's time to blow stocks out, man. I've already liquidated my 401k and invested it in used drill bits.

Ken: So, you must've been selling yesterday as well given that nice jump we saw in the oil price.

Doe: Yesterday? No way. Are you crazy? I was buying. That was a bullish increase in oil!

If oil rises by the same percentage on two consecutive days, but the stock market rises on one and falls on the next, clearly the market isn't just focused on oil prices. What about Cisco's outlook, renewed financial contagion fear, profit-taking, the Miley Cyrus scandal, rising interest rates, exchange rate expectations, the productivity and pending home sales data, the weakness overnight in Asian markets, valuation concerns, etc.? Furthermore, there are large institutional investors who trade based on technical criteria. Maybe some large quant funds exacerbated yesterday's selling with a large sell order based on some technical threshold being violated. Perhaps Buffett and Munger had a spat and Munger started a rumor that Buffett really preferred Diet Pepsi Vanilla to Cherry Coke. Maybe Grandma had to sell off her IRA to pay her mortgage, health insurance, and grocery bill.

Oil prices are just one piece of the puzzle. All we really know is that when the stock market rises, demand for equities exceeds supply that day, and the reverse is true when it falls. It's fine to say that the stock market fell and oil prices rose, but we really don't know the extent to which the oil price rise (or any other factor) CAUSED the decline in the stock market.

(As an aside, let's not forget that the energy sector is a beneficiary of rising oil prices, and the energy sector is a growing part of the S&P 500 and a key reason that overall corporate earnings haven't completely imploded.)

Also, am I the only one amazed at how the press as a whole comes to the same conclusion as to what drove the market? All of these different people sitting in Seattle, Chicago, New York, and London all come to the same conclusion. I couldn't find one headline attributing yesterday's fall to anything other than the rise in oil. Are they all using the same source? Are they just wiring their stories in from the same hash house in Amsterdam? Are they the product of inbreeding?

I've got to run. I've got a hot tip on a used drill bit.

Disclosure: The author is not long used drill bits and does not condone the reading of entrails.