Correlation: WTI crude and S&P 500

The moral of the story is in a normal environment strong stocks = strong economic performance = greater use of crude products = huge crude demand = less inventories volume = higher prices.

Equation Equally reversible as a straight line equation except in times of Mid East War / disruption or perceived disruption of supply
 
Quote from m22au:

This topic has addressed in various threads, but I thought that today is a good day to start this thread.

At the time of writing the S&P 500 is at 1,148 or so and WTI crude at $83 or so.

The two have experienced a strong positive correlation for the past 12 months.

If risk appetite continues to improve, then it's reasonable to expect both US equities and oil to continue to rise.

However at some point a "high" oil price will hurt the real economy, and/or hurt equity valuations.

What do you think that "high" oil price is? $90? $100?
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Bump ...

ES front month at 1118.00 or so.

CL front month at 81.40 or so.

ES / CL ratio is therefore about 13.73

I'm sure there are some equity investors are overjoyed with stockmarket gains since early July, but will those gains continue if oil climbs above $90 or even $100?
 
Depends upon if the oil price climb was due to economic activity strength (demand) or physical supply contraints.
 
Quote from bone:

Depends upon if the oil price climb was due to economic activity strength (demand) or physical supply contraints.
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It's my contention that the reason for the oil price rise is not relevant.

Oil and equities have experienced a strong positive correlation for the past 12-15 months. If this strong positive correlation continues and risk appetite continues to improve, then at some point a "high" oil price will hurt the real economy, and/or hurt equity valuations.

I think a price of $100 per barrel is probably enough to hurt the real economy, which will probably flow through to lower profits. Furthermore an oil price above $100 might also reduce the appetite of "investors" for risk.
 
If the oil price rises primarily based upon correlated economic demand, it will also come off accordingly when the equity markets sell down.

If the oil price rises based upon supply constraints, the crude curve will not come off when equities sell down at the same rate - or can even rise despite the equity index levels.

Correlations come and go, and it is important for you to understand the fundamentals driving the relationship. I would invite you to look farther back than 15 months in the crude/equity relationship, and to also look at the Natural Gas market in the context of supply and not just HDD demand.
 
Quote from bone:

If the oil price rises primarily based upon correlated economic demand, it will also come off accordingly when the equity markets sell down.

If the oil price rises based upon supply constraints, the crude curve will not come off when equities sell down at the same rate - or can even rise despite the equity index levels.
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I have a slightly different interpretation - that the main driver of the (US Dollar) price of oil in recent months has been the perceived value of the US Dollar.

Price and ratio update:

ES front month at 1155.00 or so.

CL front month at 83.50 or so.

ES / CL ratio is therefore about 13.83

NYSE:AMR close on 6 October 2010: 6.21 US Dollars.

$XAL close on 6 October 2010: 43.86

Commentary:

Oil above $83 has not hurt the stockmarket as a whole, nor the airline sector as a whole as yet.

However the stock price of AMR, an airline with a tiny profit margin compared its competitors
(http://seekingalpha.com/article/215046-airlines-set-for-record-q2-revenues) is not performing that well.
 
Quote from Dan Dierdorf:

Is this implication in this thread that trading correlations is easy money?
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Not at all. I started this thread because my thinking was (and is) along the following lines:

1. The S&P 500 and $WTIC have experienced a strong positive correlation since March 2009.

2a. If risk appetite continues to improve,
2b. and this correlation continues,
2c. then it's reasonable to expect both US equities and oil to continue to rise.

3. However at some point a "high" oil price will hurt the real economy, and/or hurt equity valuations.

This is particularly true for those companies who are hurt by "high" oil prices, including but not limited to airlines.
 
Quote from m22au:

Not at all. I started this thread because my thinking was (and is) along the following lines:

1. The S&P 500 and $WTIC have experienced a strong positive correlation since March 2009.

2a. If risk appetite continues to improve,
2b. and this correlation continues,
2c. then it's reasonable to expect both US equities and oil to continue to rise.

3. However at some point a "high" oil price will hurt the real economy, and/or hurt equity valuations.

This is particularly true for those companies who are hurt by "high" oil prices, including but not limited to airlines.
More...

I'm not going to get to deep into my correlation analysis (involving fundamentals and technical analysis) until Oil reaches $94.

Until then...trade as usual.

Mark
 
Quote from m22au:



3. However at some point a "high" oil price will hurt the real economy, and/or hurt equity valuations.
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It also "hurts" Consumer Confidence and other things.

Anyone who has really studied this stuff knows that oil & stocks bottom out then rise together until oil hits an economic "pain point." Large month-over-month increases in oil prices have been bad for stocks...this has been true since the 1970s.

After the March 2009 bottom in stocks/commodities, oil's "pain point" for the economy is in the current area (low-to-mid 80s).
Look at Jan, April and early August of this year.

That's also where oil was when stocks hit their all-time highs in Oct. 2007--though oil & gold continued to rise then peak 6 months later. Then--and now--a Dollar-killing, commodity-boosting Fed was only able to do so much for stocks, and commodities and non-US currencies were the real beneficiaries.

Perhaps oil will break its April high, but don't expect a long-lasting stock rally if oil hits the 90s and gas prices go back to $3.00+/gallon.
 
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