Today we investigate the relationship between oil and the broad US market, using the S&P 500 index as a proxy.
A common thought is that the two functions are inversely correlated, with the US market in danger whenever oil rises too high.
The relationship has been a complex one over the past 11 years, but the correlation is positive most of the time.
In particular, we see from 2003 until late 2007, both oil and the market rose in tandem. The only time the two records show an inverse correlation was during the windup to the financial crisis--from late 2007 to July 2008.
The collapse in both market index and oil price through the second half of 2008 shows up quite clearly. The two prices rise in tandem from early 2009 to the end of 2012.
It doesn't seem logical that the S&P should be positively correlated to oil prices--so it is more likely that both records are correlated to the same thing--inflation. But what to make of the last 18 months, in which we see an almost vertical rise in the stock market without an increase in the oil price? Is an American renaissance in the works, powered by increased American oil production? Or is it due to the much rumoured mass purchase of securities by financial institutions, powered by monetary creation? Is it being done to prevent another period of negative correlation, which might foretell another economic crisis? Stay tuned . . .
A common thought is that the two functions are inversely correlated, with the US market in danger whenever oil rises too high.
The relationship has been a complex one over the past 11 years, but the correlation is positive most of the time.
In particular, we see from 2003 until late 2007, both oil and the market rose in tandem. The only time the two records show an inverse correlation was during the windup to the financial crisis--from late 2007 to July 2008.
The collapse in both market index and oil price through the second half of 2008 shows up quite clearly. The two prices rise in tandem from early 2009 to the end of 2012.
It doesn't seem logical that the S&P should be positively correlated to oil prices--so it is more likely that both records are correlated to the same thing--inflation. But what to make of the last 18 months, in which we see an almost vertical rise in the stock market without an increase in the oil price? Is an American renaissance in the works, powered by increased American oil production? Or is it due to the much rumoured mass purchase of securities by financial institutions, powered by monetary creation? Is it being done to prevent another period of negative correlation, which might foretell another economic crisis? Stay tuned . . .
Do you trade on this type of analysis?
ReplyDeleteIf so does it do well?
If so are the results regularly correlated to your analysis when your in the trade?
It looks like for periods it could be if one is careful and as wiley as Soros' press portray's him.
I have traded on it in the past and done alright, but it requires constant attention. I ended up losing a lot of it when I went to Africa and could no longer watch on a daily basis.
DeleteBut mostly my interest is in trying to develop means of extracting dynamical information from complex systems. I am really interested in natural systems, but economic data sets are available in large number and are very precise, making them easier to practice on .
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