Will Oil's Fall Damage The Rally?

I have to throw a flag in from the sidelines calling foul on the learned men on CNBCs Fast Money table Friday (video below) as traders remain bullish on the big screen.  In fact, they do not believe crude's fall will impact our rally.  Really?  Josh Brown stated there was no correlation b/w the price of oil and the S&P500 and did their level best to downplay the selling in crude oil.  Alright, overlay a comparison chart (left) and you won't see black gold having an enormous impact on the market with a few exceptions BUT, the energy complex represents an average of 6.9% of U.S. GDP. 

If it's a bear market, this changes the scenery.  Come on Josh; there's much more that you're not saying and we know it.  Stay with me here.  So typically if we saw a ten percent correction in crude, another sector in the S&P would merely step up to the plate and help lead such as tech or financials.

This time, however, we see regional banks such a Cullen-Frost (who lend to oil names down here in Texas for oil and gas projects) not only falling, but falling HARD on heavy volume......right OUT of a wide range top.  It not only took out a years worth of stops, it fell hard below the 20 month SMA which has historically been solid support for this Texas regional bank.  Risk of defaults in regional banks?   In these parts, one would say "esto no es bueno".

Concurrently, the Barclays high yield bond fund, $JNK and iShares high yield corporate bond fund $HYG (proxys for risk appetite) have all but taken out not only their 2014 gain, but the 2013 as well......closing in on the May/June 2012 low now.  If this isn't telling you this is more than a typical correction, it should be.

Now here's where I believe the sell off in crude becomes more important than being said:  Capital expenditures being lowered and postponed in energy names and THAT, my friend, is a huge difference than past corrections in black gold.  You never had these worries in financials and bonds when crude itself had a 10% correction.

As pointed out by Ashraf Laidi

Yes, Joe the Plumber will have more cash to spend with gasoline near $2/gallon BUT the benefit will be nothing in comparison to the cutback on capex spending.  With such low crude prices, companies will postpone capital expenditures, new wells, new machinery, whatever they can which is going to impact every one of their suppliers............and you can see it in all the oil and gas suppliers such as SLB.

Now *IF* Russia, Saudi Arabia or someone were to balk and cut production, then supply will tighten and prices will rise however at this juncture, no one is blinking.  Russia holds almost no debt and tons of cash reserves.  They can bide their time as can Saudi Arabia with only $10/barrel needed to remain profitable.  Unless a pipeline explodes, this could go on for some time.  O&G names with heavy debt I'm sure are already feeling the pain.  Just look at the oil services ETF $OIH and you won't want to catch that knife. 

If commodities are, in fact, reverting to the mean, I won't be buying any energy names just yet.  It could be a while as they postpone projects, tighten their belts, reorganize, restructure and yes, some definite M&A may be ahead.  But M&A alone is not a reason for "me" to buy a stock.  I want my money working for me; not sitting with losses hoping there's a buyout.  Call me crazy but I'm staying away from the energy complex or shorting it further on any spike.  By the time all the dust settles, I don't think it will be pretty.

Bottom line on the rally, yes, I think it's going to weigh on the rally.  How much is yet to be seen but this is not your typical 10% oil correction.  Financials may not be able to help take up the slack.  Then there's the strong U.S. dollar.  Oye.  The holidays can't get here fast enough.  With them comes lower volume and usually, less selling pressure.  Unless it's different this time.

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