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Why this crude bear market is far-reaching: trader

By Stephen Guilfoyle, chief market economist at Stuart Frankel & Co.

Good Afternoon,

As big stories mount, the oil story has to be right up there. Like a pitchfork with several prongs, the relapse of WTI crude into bear market territory is far-reaching. One prong is the energy sector (XLE) itself. That’s what you witnessed yesterday. The entire sector took a beating step for step with the underlying commodity.

Then there’s the transports (^DJT), or at least those that haul the stuff. They’ve been underperforming the general marketplace for some time now (let’s start with May), and that gets the Dow theorists fired up.

Lastly, there’s the on-again, off-again correlation that existed between equities and oil throughout most of last year’s decline. That daily comparison had slackened and fallen out of the public eye once crude prices climbed up into the $50s. Should WTI crack this $39 level and swing lower, does this correlation reappear? Food for thought.

It looks as if Japan laid another egg. At least, that’s what Japanese markets are telling us right now. The prime minister’s economic stimulus plan, which has been approved by his cabinet, will throw about $274 billion at the Japanese economy. This plan does include some helicopter money for lower income folk.

Why the disappointment? About $200 billion of this spending comes in the form of targeted low interest loans. Only a quarter of the plan or so will result in actual fiscal policy expenditures. If you’re looking for proof of investor sentiment, the Nikkei 225 is off 1.5% on the day, and USD/JPY is trading closer to 100.50 than it is 102.00.

There may have been no immediate reaction, but it’s plain to see that financial stocks are being slapped around throughout Europe. If a semi-ridiculous batch of stress-tests that weren’t even graded on a pass/fail basis were not enough, then I guess STOXX Ltd.’s decision to toss Credit Suisse and Deutsche Bank from the Stoxx Europe 50 Index by next week was trigger enough.

European traders said “sold!” to European banking shares today in a big way. Most major equity indices across the continent are down more than a percent, with many individual banking names off between 5% and 8%. You’ll want to watch banking stocks today for any signs of perceived counterparty risk from abroad.