The International Energy Agency released a bombshell last week when it announced the coordinated release of 60 million barrels of oil from global reserves in order to offset lost Libyan production. Half will come from the United States, 30% from European reserves, and 20% out of Asia. Combined with recent strength in the U.S. dollar as well as increased Saudi production, crude oil collapsed on the news.
Initially, this was seen as a negative for stocks as the energy sector was pulled down. But at the same time, investors are slowly beginning to realize that a hard drop in crude is precisely what the economy needs to get back on the right track via increased consumer confidence. Based on current crude prices, gas should be 30 cents cheaper at the pump.
Indeed, UBS analyst Jon Rigby felt the tailwind provided by lower energy prices could be enough to be considered “QE 2.5” — a reference to the Federal Reserve’s nearly expired $600 billion QE2 money printing operation. It’s a sign that governments in the developed world are serious about supporting growth in the same way the Fed’s QE2 showed that it was serious about killing deflation during last summer’s economic slowdown scare.
As a result, I expect consumer confidence to continue to improve. Already, the Bloomberg weekly consumer comfort index has pushed well off its lows and has returned to its February-March highs as shoppers shake off the Greek debt woes, inflationary pressures, and an economic soft patch just as they shook off the Japanese earthquake.
No surprise then that newly optimistic investors rotating back into cyclical stocks. The chart above shows how the Morgan Stanley Cyclical Index is perking up vs. the Consumer Staples SPDR (NYSE: XLP). The XLP holds stocks like discounter Wal-Mart (NYSE: WMT) and soap-maker Procter & Gamble (NYSE: PG) while the Morgan Stanley Cyclical Index holds stocks like Ford (NYSE: F) and appliance maker Whirlpool (NYSE: WHR).
I use this ratio as a proxy for cyclical flows. And right now, percentage price oscillator indicator for the ratio of these two groups of stocks has just flipped positive for the first time since this multi-month corrective phase started way back in February. That’s a big deal. And it suggests that Wall Street traders are betting that the American consumer is about to bounce back thanks to lower prices at the pump.
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