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Stocks , Energy

Should Stock Investors Prepare for an Oil "Shock"?

Look at this test of the 52-week correlation of oil and stocks

by Bob Stokes
Updated: June 18, 2019

Are falling oil prices bullish or bearish for stocks?

You might think the answer to that question would be clear by now -- a settled matter -- given the countless news stories, editorials and opinions that have linked the two over the years.

But someone reviewing the historical headlines when oil and stocks were in the news might easily get confused.

For instance, on Aug. 12, 2008, USA Today ran this headline:

It's hard to lose betting on stocks as oil falls

A portfolio manager quoted in the article provided the reasoning that supports the headline: "If oil prices are falling, a key cost for both consumers and businesses is also falling. It acts as a benefit for the stock market overall."

Seems to make perfect sense.

But then the earnest researcher comes across this Dec. 12, 2015 Associated Press headline:

A rout in crude oil prices hammers stock market

The article said that a slump in oil prices is a sign of global economic weakness, so stock investors hit the sell button.

This reasoning makes sense too -- but, obviously, the message of the two headlines conflict. One says falling oil prices are good for stocks, the other says falling oil prices are bad for stocks.

So, returning to the question of whether falling oil prices are bullish or bearish for stocks, the answer is neither.

Robert Prechter's 2017 book, The Socionomic Theory of Finance showed this chart and said:


One can reverse the causality asserted in any exogenous-cause claim and sound perfectly logical either way...

As is typically the case with such dual lines of reasoning, neither causal formulation explains the data. The chart shows that for the past 21 years there has been no consistent relationship between the trends of oil prices and stock prices on a 52-week basis... Sometimes stock and oil prices go in the same direction, and sometimes they go in opposite directions...

In the end, we can determine no consistent causal relationship whatsoever between the two price series.

EWI's research reveals that the stock market's price action follows the Elliott wave model and is not governed by any exogenous cause, including oil.

Even so, a June 13 financial news article said (CNBC):

Dow futures rise as oil prices surge on tanker incident in the Gulf of Oman

But the Elliott wave model anticipated the Dow's rise before the tanker incident.

On June 5, our U.S. Short Term Update said:

[The current Minor wave] is still-progressing. This means that the Dow Industrials and S&P 500 index will rally.

As you may know, stocks were up for the second straight week as of Friday, June 14.

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Will You Believe Your Own Eyes?

Renowned Elliott wave expert Hamilton Bolton once said of Elliott wave analysis:

"The hardest thing is to believe what you see."

In other words, take the chart pattern at face value -- unless and until that message clearly changes.

The just-published June Elliott Wave Theorist mentioned that Hamilton quote -- and there is a big reason why.

Hint: It speaks to a stock market forecast that stretches into the year 2021!

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