Stocks will take their cues from the oil market this week as unrest rumbles through the Middle East. But so far equity investors are sanguine, believing the economic recovery wins the day.
Sentiment is driving large daily swings as traders vacillate between the fear that oil prices will hit consumers and derail the recovery, and the euphoria that the US labour market is turning a corner.
Reports of escalated fighting in Libya and protests in Bahrain, Yemen and top oil-exporter Saudi Arabia rattled investors on Friday – oil rose, equities fell.
“We are in such a sentiment-driven market right now and everyone is watching the equity market with one eye and oil and commodity markets with the other," said Michael James, a senior trader at Wedbush Morgan in Los Angeles.
Some hedge funds are trading the inverse correlations between oil and equities that have grown in recent weeks, while other investors are shifting their exposure to oil stocks and paring back in overvalued areas of the market.
Through it all the S&P 500 is down less than 2 per cent from a near three-year high hit in late February, which even bears concede is a remarkably robust performance. Last week, stocks ended flat.
So far the trade seems to be a reallocation of risk within equities rather than a move out of stocks altogether.
The S&P energy sector has risen 10 per cent since the middle of January when troubles in the Arab world began.