The Dow Jones Industrial Average’s (INDEXDJX:.DJI) recent slide indicates that the market might be trying to price in the impact of oil’s plummeting prices. Considering how prescient the market can be, it should be no surprise to see the oil and energy portions of major indices to be ‘fully adjusted’ once their actual earnings report comes in. It would be no surprise that these reports would reflect just how badly their income was hit by oil’s continued decline. We’re not just talking about petroleum dealers and distributors here-there are a lot of companies involved in the process of getting oil out of the ground and into your car’s tank. All those companies will be affected. Indeed, oil rig order cancellations have spiked up to match the crash in new oil well permits.
So far, the market has been groping for a bottom price. It still has to find it because there are no hard earnings to base pricing on. Right now, the market is trading primarily based on anticipation and fear-a very lethal cocktail of market sentiment if ever there was one. Indeed, the incoming slew of earnings reports from energy and energy-related firms would actually bring some comfort-despite the accompanying pain-because they would at least give the market some objective guidance as far as pricing is concerned. We can now see just how bad oil’s crash has hit the bottom line.
Also, the release of oil company earnings might open the door to opportunities for traders who have a high tolerance for risk. There are many oil and oil services companies who are heavily leveraged and operate on relatively thin margins. These would make for great consolidation or buyout plays. Expect the smart money to drive down the stock prices of such companies only to scoop them up when they hit rock bottom in anticipation of a buyout or takeover. This is very risk because when a stock is in that territory, reorganization or outright bankruptcy are also very clear possibilities.