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Most Dangerous Stock Market Myths: Part Three, The Crude Oil Connection
Are higher oil prices bearish for stocks? These myth-busting charts set the record straight

By Nico Isaac
Thu, 19 Jan 2012 16:30:00 ET
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As I write, the wheels on one of the most dangerous stock market myths go round and round in the mainstream finanical press. SEE this news item from January 12: "A drop in oil prices and strong bond auctions in Europe drove US stocks to a slightly higher close today." (Irish Examiner)

It's time for this particular notion to meet its maker. Here, in his February 2010 Elliott Wave Theorist, EWI President Robert Prechter does just that via the following commentary:
 
"It would take weeks to collect all the statements that economists have made to the press to the effect that recently rising oil prices are 'a concern' or that an unexpected (they’re always unexpected) 'oil price shock' would force them to change their bullish outlook for the economy. For many economists, the underlying assumption about causality in such statements stems from the experience of 1973-1974, when stock prices went down as oil prices went up. That particular juxtaposition appeared to fit a sensible story of causation regarding oil prices and stock prices, to wit: Rising oil prices increase the cost of energy and therefore reduce corporate profits and consumers’ spending power, thus putting drags on stock prices and the economy.

"Figure 7 shows, however, that for the past 15 years there has been no consistent relationship between the trends of oil prices and stock prices. Sometimes it is positive, and sometimes it is negative. And the quarters during this period when the economy contracted the most occurred during and after the oil price collapse of 2008. Thereafter oil prices doubled as the economy was reviving in 2009. None of this activity fits the accepted exogenous-cause argument."

 
 
In fact, if you were paying very close attention to the above chart, you saw that the correlation between the two supposedly opposing markets has been more positive than negative.
 
On this, Bob Prechter added this additional insight into the oil/stock connection in his August 2011 Elliott Wave Theorist:
 
"In the couple of weeks off the [May 2011] high, economists were quoted -- as they always are -- saying that this drop in crude oil is going to be very bullish for the economy... And we said, 'No... the S&P and oil look like virtually the same market."
 
 
False causalities can lead you astray. Well-made charts help you stay on track. Stay in front of the most memorable time in recent economic history via EWI's unparalleled Financial Forecast Service today.
 
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