The US stock market and the oil market
appear joined at the hip. The Great Graphic here, created on Bloomberg, shows the
correlation of the two markets. It is near 0.77, which is the
highest since September 2013.
The correlation was conducted on the level of the S&P 500 and the level of the front-month light sweet crude oil futures
contract. It tells us that the two markets
have been moving in the same direction nearly eight of ten sessions over the
past 60 sessions.
As the chart shows (on the left is the
correlation and on the right is the frequency distribution), the correlation is not stable, and presently it is
at an extreme. Although it is a descriptive
statistic, I read it as a warning that such a tight fit is not sustainable
and will break down. Although the correlation holds, it is a salutary caution to short-term traders that
while knowing the direction of oil has been a good tell of the direction of the S&P 500, one ought not
bank on it for much longer.
Investors are more interested in the
correlation of returns rather than levels. Here the correlation (percent
change) is about 0.33 over the last 60 sessions. This is the lower end of four-month range. The peak
since 2013 was set this past November a little above 0.50.
Over the past 30-days, the correlation of
returns is near 0.25. Yesterday it was nearer 0.20, which
is lowest since last June.
Great Graphic: S&P and Oil--Conjoined Twins or Distant Cousins that Sometimes Look Alike?
Reviewed by Marc Chandler
on
January 14, 2016
Rating:
Reviewed by Marc Chandler
on
January 14, 2016
Rating:
