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spOILer Alert

Posted by kdadmin on December 14th, 2014.

Oh, Media Hysteria, have you no shame?
Yes, oil prices have gone down, drastically, since mid June. Yes, they have dropped nearly 13% in the last week. Yes, the S&P 500 has dropped 3% in the last week. But the S&P 500 is still up about 3.5% over these six months. So … While oil prices certainly have the ability to cause global panic; unless your entire portfolio is in oil futures (or worse, Russian rubles), it probably doesn’t directly impact you.

How about some fact over fiction? The following chart tells a different story than the media hype. The blue line is SPY (an ETF that attempts to track the S&P 500). The orange line is OIL (an ETF that attempts to track the spot price of Brent Crude Oil). The red line is VXX (an ETF that attempts to track the VIX volatility index).

Notice anything? Right. The price of OIL (orange) has simply plummeted (down 46.7%). But SPY (blue) has been comparatively stable, managing about a 3.5% gain. The VXX (red) is starting its third spike, the previous two of which lasted roughly three weeks.

Spy Oil Vxx

If the panic selling continues, the VXX will likely surge upward, and we will probably experience more inflamed headlines of armageddon. Pundits would have you believe that a crash in the oil markets will destroy modern civilization as we know it because of the domino, or contagion, effect (panic selling in one sector causes panic selling in other previously healthy sectors). This is just stupid. If the contagion fears were true, then we would have to see broad market stock prices drop in lock-step with OIL, and we’re not seeing that.

But what does this mean to you? First, it means the sky isn’t falling. Second, if you take a gander at CNN’s shameless Fear and Greed Index below, you will notice that we just tripped into the “Extreme Fear” zone on Friday. So, it’s likely we’ll see more of the paranoid volatility freak show in the short term.

Fear and Greed

Third, if you recall my post from October 14, Hunt the Black Swan, when this index read 1 out of 100, what happened over the next six weeks? Right, the market climbed out of the pit of despair and topped out at an 11% gain since those October lows. While past performance may not be indicative of future results, as noted on my Disclosures page, it does offer some comfort that, indeed, the sun may come out tomorrow, and bring with it a buying opportunity.


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