Oil’s Sharp Decline Sign of Gathering Storm

Oil prices tumbled last week to their lowest levels in over a year. One trader believes this weakness is a leading indicator, showing that global growth is facing serious challenges. There are two main factors causing these challenges, a coming fiscal cliff and the euro zone crisis.

By: Lee Brodie
Published: Wednesday, 20 Jun 2012

Traders are always looking for a major market ‘tell’ and CNBC's Fast Money pros think it’s coming from the crude markets

Oil prices [CLCV1 78.43 -1.33 (-1.67%) ] tumbled on Wednesday to their lowest levels in a year and a half, with declines extending into the close, even as the S&P [.SPX 1310.79 -24.23 (-1.81%) ] moderated and pared losses.

And trader Josh Brown believes the action is the equivalent of the oil market jumping up and down trying to get your attention.

He sees the weakness as a leading indicator - one that says global growth is facing serious challenges.

And those challenges are probably due to two factors.

1. “We’ve got a fiscal cliff coming,” says Brown. That is companies will be immobilized by the tax increases and spending cuts that are all scheduled to take effect at the very beginning of 2013. Although it’s widely believed lawmakers won’t allow the economy to go off the ‘fiscal cliff’ the Street has no expectations of a resolution until after the November election, at the earliest. Therefore the belief is companies will be reluctant to either spend or create jobs anytime soon.

2. “Nasty stuff in Europe still lies ahead,” Brown adds. Largely the Street believes the financial woes of Spain and Italy will flare before the summer ends. Trader Jon Najarian of OptionMonster says if the the Europe crisis were a football game we’d be at the end of the second quarter. In other words, a lot of crisis to come.

All told, Brown, Guy Adami and other pros believe headwinds could become quite severe and warn investors to prepare, now.

"The world gets scarier by the day to me," says Adami, managing director of stockMONSTER.com. "The energy market is telling me that growth is slowing globally."

“Our tactical accounts are 100% in cash,” adds Brown. He wants nothing to do with stocks. But before you go into hibernation, it’s worth noting that not all the Fast Money traders are negative. Trader Brian Kelly is quite bullish.

Kelly, founder of Shelter Harbor Capital, thinks the decline in oil has everything to do with animosity in the Middle East. "The Saudi's have no problem with lower oil prices because they squeeze Iran."

He says forget oil; “as long as Fed and central banks around the world are poised to intervene, I’m a buyer of stocks especially cyclicals which tend to outperform in this kind of environment.”

What do you think? We want to know!

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