An Ugly Breakup -- A Look at the Relationship Between Oil and Stocks
Friday, March 4, 2011 at 02:37PM From the start of the bull market back in March 2009 until just recently, oil and the stock market had a seemingly wonderful relationship. Most of the time, when stocks moved higher, oil moved higher as well. On the rare occasion that equities headed lower, oil tagged along to the downside. This wonderful relationship has recently become strained, however, and the two have seemingly chosen to go their separate ways.
Below is a chart highlighting the rolling 1-month correlation between the S&P 500 and oil (using daily % changes) since the start of the equity bull market on March 9th, 2009. The higher the number on the positive side, the more closely the two are moving together. The lower the number on the negative, the more the two are moving in the opposite direction. As shown, the correlation between the stock market and oil remained positive up until just recently, but the breakup between the two has been swift and extreme. At the moment, the one-month correlation between the two stands at -0.70.
The correlation chart is a good way of showing how high the stock market was allowing oil to go before oil's price began to affect stocks. Oil rallied alongside stocks from the $30s to the $80s, but once it got into the high $80s and then broke $90 and finally $100, the stock market began to break away and move lower. With oil now into the triple digits, stocks are simply heading in the opposite direction of the commodity on a daily basis.
The question everyone has now is whether the stock market can adjust to oil at these levels, or whether oil will need to pull back before stocks can start to head higher again.
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Reader Comments (3)
The chart of Oil, USO, shows that investors, knowing that when a central bank monetizes debt, commodity price inflation follows. Ben Bernanke’s quantitative easing policy has given seigniorage to oil as a globally sovereign currency, as the price of West Texas Intermediate Crude, $WTIC, has risen from 72.5 to over $100 since QE 2 was first announce in Jackson Hole in August 2010.
Failure of the economic and political paradigm of Neoliberalism occurred, February 22, 2011, as seigniorage failed, with the downturn in distressed securities, like those held in FAGIX, which caused the stock market, ACWI, to turn lower.
Quantitative Easing 1 and 2 have resulting in an explosion of commodity prices, stimulating social revolutions in Middle East, MES, and African, AFK, countries, which have driven oil prices, USO, to the Septemeber 2008 level, and which have in turn, caused inflation destruction, turning down stocks prices, and creating a loss of seigniorage, that is moneyness.
Urban Dictionary defines inflation destruction as the fall in investment value that accompanies derisking and deleveraging out of investments that were formerly inflated by money flows to, and carry trade investing in, high interest paying financial institutions, profitable natural resource companies, and high growth companies.
On March 4, 2011, with oil moving above $103, world stocks, ACWI, succumbed to inflation destruction, and traded 0.8% lower to 48.71.
The chart of world stocks monthly, ACWI Monthly, shows that an Elliott Wave 3 Down commenced in stocks globally on February, 18, 2010 from a high of 49.24.
The chart of the S&P Weekly, SPY Weekly, shows that an Elliott Wave 3 Down has commenced in the S&P, the week ending February 18, 2010, when SPY fell from 134.53.
The turning down of Banks, KBE, means that the world has passed through an inflection point. The world has passed from the Age of Leverage and into the Age of Deleveraging with the exhaustion of Quantitative Easing and with the failure of yen carry trade investing, as seen in the failure of the Optimized Carry ETN, ICI, on the very day that QE 2 was announced.
Evidence of failure of seigniorage also comes from the Jody Shenn Bloomberg report: “Securities backed by option adjustable-rate mortgages, the home loans that allow borrowers to decide how much they pay each month, dropped for a second week as investors speculated a rally pushed values too high. Typical prices for the senior-most option-ARM bonds fell as much as 4 cents to about 62 cents on the dollar, according to Barclays Capital”.
Neoliberalism failed February 22, 2011, as seigniorage failed with the downturn in distressed securities, like those held in FAGIX, which caused the stock market, ACWI, to turn lower.
The Great Bull Market which came through carry trade lending and Quantitative Easing 1 and 2 is history. The short, medium, and long term trend is down. Those who are advising their clients to stay invested long, are doing them a dis-service, as they have cut them off from a profitable short opportunity. Clearly an investment demand for gold has arisen and will remain strong. Wealth can only be preserved by investing in and taking possession of gold, GLD, and silver, SLV, bullion.
You end "The question....... or whether oil WILL NEED TO PULL BACK before stocks can start to head higher again." (my emphasis)
Any pull back in oil price depends on supply/demand/speculation in the oil market. Buyers are really interested in keeping their motors, (etc.) running: they are NOT trying to "do a Bernancke" and use their finances to push stocks higher, but to keep their businesses moving as smoothly, and profitably, as possible. The real economy does not NEED higher stock prices, it needs honest, well founded, non-manipulated success, leading to higher profits, and then (in a non manipulated, i.e. Bernancke free,) world - higher stock valuations. Who needs Fed-Fudge ?
this is nice... a longer time frame would be even better