Update: Oil Falls, Markets Follow
As oil drops sharply, Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) are also falling . This is starting to bring the Dow Jones Industrial Average lower as these are major components of the thirty stock index. The United States Oil Fund LP (NYSE:USO) is down in afternoon trading at $44.01, -1.14 (-2.52%). The key seems to be a possible cease fire in Libya and an overbought situation in oil as profit taking comes in.
Oil helps the markets on the upside when it is slow and steady but hurts when it is fast and sudden. The oil move on Friday began to scare the markets as it was quick and sharp, jumping above $113.00 per barrel. The quick spike in oil is known as a shock and scares money out of equities. Money runs from stocks on sharp oil spikes as investors fear demand destruction for good and services, as money once used for buying goods must now be used to purchase energy. In an ideal world, oil would inch up slowly, flat to positive each day. Not only is a fast spike in oil a negative for the markets, but when oil declines, it takes down many of the key stocks that make up the S&P 500 and Dow Jones Industrial Average such as Chevron and Exxon. This is what is happening today in the markets. A sharp drop in oil is pushing key stocks lower and taking the indexes with it.
On the technical side, the USO just hit the 200 moving average intra day and bounced beautifully. For the day, this is most likely the low.