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Oil And Stocks: The "Correlation" Breaks Down
When oil goes down, do stocks really go up?
September 2 was the first day of trading after the long Labor Day weekend, and the DJIA opened with a sharp gap up.
That same morning, crude oil started the day with a sharp drop.
So what, you ask? Isn't that how it's supposed to be – when oil goes down, stocks go up? Market analysts repeat this "rule of thumb" every day, in print and on TV – so it must be true.
They do, indeed. But does saying it make it so? Consider this:
"Most pundits were talking mainly about oil this morning [Sept. 2], which was extremely volatile. They tried to explain the strongly higher stock market open by the fact that oil prices were down big. By the end of today’s session very few market observers talked about oil and stocks together.
"The reason: both ended today’s market session DOWN, once again showing that the supposed negative correlation between the two asset classes is ephemeral (see Stocks and Oil chart on p.6 of the September Elliott Wave Financial Forecast). If these trends continue, pretty soon pundits will be trying to make the case that lower oil is BEARISH for stock prices. Just wait."
– Elliott Wave International, Short Term Update, Tuesday, September 2, 2008, 4:30 PM Eastern.
"Just wait," indeed. If oil drops below $100 (a scenario EWI's Energy Specialty Service considers highly probable), can you imagine news headline like these, for example?
"Stocks Fall As Continued Declines In Crude Indicate Slowing Consumer Demand"
Or,
"Shares of Energy Companies Drag Stocks Down"
If you want a market indicator that doesn't change with the wind, try Elliott wave analysis. For starters, see that "Stocks and Oil" chart on page 6 of the new, September issue of The Elliott Wave Financial Forecast. You can see it risk-free, online, right now – here's how.
- DJIA
- NASDAQ
- S&P
- U.S. Treasury Bonds
- U.S Dollar
- Euro
- Gold
- Silver
- Real Estate
- Derivatives
- Autos
- Airlines
Read forecasts for all these markets inside EWI's Financial Forecast Service now, risk-free for 30 days. Details.