Stocks have taken their own path on the most recent rally in anticipation of central bank easing. Other assets are not behaving like they did before and after previous rounds of central bank easing (whether QE, LTRO, or Operation Twist). Crude oil provides a clean illustration of this.
The chart of crude oil vs. the SPX shows a relationship that was once highly correlated, but that has unhinged in the last 6 months. Emerging market growth has clearly slowed. U.S. stocks, though, are behaving based on a scenario of “seeing through the trough” in economic data. But crude oil tells a different story.
The black line on this chart shows the front month West Texas Intermediate futures contract. Crude oil sold off significantly with global markets (particularly emerging markets) from March to June, before bouncing at support between $75 and $80. However, in the context of its recent decline, this bounce has been quite tepid. Meanwhile, the SPX index had a much more subdued selloff, particularly when compared to similar behavior in the past 3 years.
Investor psychology has been trained to buy the dips in stocks over the past 3 years. I don’t mean to be a broken record. I am just following the evidence I see. And the evidence continues to suggest to me that this is not 2010 or 2011 all over again. I think stocks are wrong.