If you have been keeping up with the news, you will know that oil futures (May) have hit negative territory for the first time in history, and that has spooked the stock market as well.
Going forward, will this be the catalyst that causes another leg down in the stock market, or will we see the lockdowns ending soon, and the economy returning to normal?
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Did You Catch This Epic Oil Crash?
If you are wondering why oil prices managed to go negative, the reason is quite simple:
Oil costs money to store.
Due to the economic collapse, oil isn’t being used much.
So all the storage facilities are filled up. So nobody who can store it will buy it from you.
If you want to get rid of oil, you have to pay someone.
When oil was trading at $20, we were already short with a target of $10.
To be honest, I did not really think it could go that low, and was prepared to take profits along the way.
But sometimes if you get the direction right, you might get lucky and enjoy a windfall profit.
It is worth noting that only the May contract dropped drastically, while the June and July contracts remained much higher.
This means that traders are expecting some economic recovery (and an increase in demand?) in the coming weeks or months.
Something interesting to note is the divergence between stocks and oil, shared by one of community members.
How Will This Affect the Stock Market?
Comparing across different asset classes, we can see that crude oil and the 10-year treasury are bearish, while the long-term treasury bonds and Gold are bullish.
The S&P 500 is somewhat sideways, and has not decided which way it would follow.
Most fund managers seem to think that the recovery will be U-shaped, meaning we can expected a prolonged sideways movement in the stock market while the real economy takes its time to recover.
The second most popular option is the W-shape recovery, meaning they expect another leg down to test the prior lows. This one has my vote as well.
And lastly only 15% think a V-shape recovery is likely.
Based on what I posted last week, there are 2 potential areas which I feel offer a high probability short trade, and if prices manage to clear the 3000 level, then I will rethink the W-shape hypothesis.
Updates Regarding the Covid Situation
Although the number of cases seem to have peaked in most major economies, and the US might want to relax its lockdown and resume the economy, there is a high risk of a second wave of infections, which might actually drive the second leg down of the stock market.
Also, the number of cases in developing countries seem unusually low, which is likely a case of not doing much tests. Hence there is a real risk that we might see an explosion of cases once the testing scales up.
Now that things have started to stabilise, many countries are starting to point fingers at China for their slow disclosure of the virus, thus allowing it to spread globally and wrecking havoc worldwide.
This could lead to more global tension and conflicts going forward.
As you can see, there are always many exciting trading opportunities in the markets, and I think that another big move is coming really soon, so now would be a really great time if you plan to start learning about trading & investing.
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