It’s come to the attention of many analysts that the correlation between oil and stocks has been moving in an almost identical fashion over the last few weeks. In fact it has almost been 100% correlation, which indicates strong returns could be in the cards. Thomson Reuters’ data shows that the 20-day relationship between oil and the S & P is 0.96 and the 50-day is at 0.90! To put this into perspective, a correlation value of 1 would mean that the two are moving identically and a value of -1 would show they are moving completely opposite.
The only other time that this has happened during a 30-day period was back in May of 2012. Stocks dropped roughly 10% while oil dropped almost $100 to $80 during the same period. When equities began to rally, this correlation ended up breaking. Last week it was reported that the market has shown a rise after 2:30PM, which is the moment that oil closes trading for the day. Stocks have been in a “tick-by-tick” decline, however this has only been during the hours that crude is actually trading on the exchange. From 2:30 until about 3:30, stocks could have a tendency to rebound if it weren’t for the psychology surrounding the negative sentiment of oil.
Citigroup research noted, “it’s not about oil and stocks, but rather a strong dollar affecting them both at the same time.”
Airlines and other oil-centric stocks tend to go down when they should theoretically go up. But some cite that it isn’t an anomaly but simply an overall decline in demand across the more general economy. Many traders, in fact, have suggested that high correlation happens all the time and in different waves. They eventually break when the masses actually begin to notice them; we saw this when the market was previously moving tightly with the euro or dollar…until it broke. For the most part, trends generally indicate a break in correlation could be coming soon and thus a telltale sign that the markets could be positioned to move back up.