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Stocks And Oil Are Highly Correlated — Sometimes
From Taki Tsaklanos: Stock market correlations tend to work most of the time, but not always, and that is the tricky thing trying to use them. This article resolves the question whether there is a valid stock market correlation to oil prices.
Interestingly, since the summer of 2014 there was a clear divergence between the stock market and crude oil prices. As it always goes, mainstream media started writing about it only very late in the process, at the end of the trend. Marketwatch noted in April of 2016 that the correlation between the stock market and oil prices was fading. Similarly, Forbes came out in February with an analysis on why the correlation between the stock market and oil prices vary, and that article appeared almost on the same day as another one on MarketWatch with a similar stock market / oil correlation discussion.
As we plot both the stock market and the price of crude oil on one chart, several things become clear right away. The chart in this article represents the weekly on a ten year time frame.
Stock market correlation to oil prices since 2006
First and foremost, the correlation between the stock market and oil prices is very high. It only diverged twice in ten years, but the divergence was very strong in that period of time. Interestingly, the divergences took place during RISK OFF times. In 2008, stocks led the decline, while crude oil did so in 2014. We indicated the times in which both diverged with the purple rectangles.
So in “normal” times, the correlation between the stock market and oil prices is very high.
Second, the articles we mentioned above were published exactly at the end of the 2014-2016 divergence. As always, mainstream media is late to the party. As the trend of divergence was ending, media started writing about it. Since then, both assets are strongly correlated again.
Third, and most important, investors should trust their own study and analysis. Charts are a great tool for self-study, and we urge investors to work on their own chart sets and their own methodology. Relying on others, certainly media or news, is not a recipe for success.
So, in sum, we conclude that stocks and oil prices have a strong correlation during RISK ON times. That is when they tend to move in sync. As markets are now in a RISK ON mode, with a positive stock market outlook, there is a fair chance that crude oil will rise to the 60 to 70 level.
The SPDR S&P 500 ETF Trust (NYSE:SPY) rose $0.84 (+0.37%) to $226.37 per share in Tuesday morning trading. Year-to-date, the largest ETF tied to the S&P 500 index has gained 11.06%.
This article is brought to you courtesy of Investing Haven.
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