Is Oil Price Volatility Good Or Bad For The Stock Market?

Today, the financial markets and stock markets are waiting for the OPEC meeting official announcement of whether or not it will cut the oil supply. This decision has caused a range bound move in oil prices of about $3 ranging between $45 and $48 per barrel over the last two days. At the official announcement, there will be two scenarios: either a spike up or down. However, this wouldn’t really be investing; it would be gambling, or very short-term investing, where if you have profits, you should lock them up and take them. We do not know what the official announcement will be, so there is a lot of speculation.

What we know is that oil prices have been trading in a range bound trend between $42 and $50 per barrel for a long time, so active traders and investors buy near the low end of the range and sell near the top of the range. Now that trend will be broken and a new trend will appear. We cannot predict the new trend yet, but we would favor a downtrend, as there has been a big rally in oil prices this year, and no significant profit-taking or the fundamental change to make such a significant increase in a one-year period very credible.

What is very interesting, though, is the stock market reaction to the oil prices and their correlation. Back several years ago, when oil prices were at $140 per barrel, some analysts were predicting that soon $200 per oil barrel would be a reality. Luckily, it did not. I say luckily because, for consumers, the high oil prices cause inflation, higher transportation costs, and higher prices for many goods.

This week, we had the Time Inc. (NYSE:TIME) stock pop up from about $13 per share to over $16.70 per share after Time’s management decided to turn down an offer of $18 per share from a hedge fund to buy it. In a fundamental analysis of the stock days before the announcement, looking at income and cash flow, which were negative for last year, I made the argument that at around $13.70 per share, the stock seemed overvalued and with very poor fundamentals. As insider trading is forbidden, it will be interesting to watch if the stock market will find my analysis correct or if the bid will price even higher towards the $18 per share region. If we realize that the offer was turned down, is there really a catalyst to drive the price up and make it realistic from a fundamental value point of view? Time will tell.

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