Is Oil Falling The Reason The Market Is Rallying?

I’ve heard this morning the reason the market has rallied in the past few weeks is because oil has fallen.  As I pointed out at the time, the market rallied because it was oversold.  Markets don’t go straight down.  Some of the biggest rallies we’ve had this decade we’re between 2000 & 2003 which was a bear market.

Take a look at the picture below.  I went back 8 years to see what the correlation was between oil and the S&P 500.  As you can see, there is absolutely no correlation at all.  It’s not positively correlated or negatively correlated.  It simply isn’t a good indicator to trade off of.  If you wake up and see oil down $3 per barrel, that doesn’t mean you should buy stocks that day.

Source:  Bloomberg

I have almost 100 observation points in the chart this decade and the correlation is .00262.  That’s as flat as you can get.

There’s lots of variables that go into what makes a market move over a long period of time.  Oil prices aren’t one of them.  Interest rates, growth rate of the economy, and earnings are the ones that work for the long-term.


1 Response to “Is Oil Falling The Reason The Market Is Rallying?”

  1. 1 HedgeFundOfOne August 8, 2008 at 3:41 am

    Though, as you mention, oil and the stock market do not have a significant long-term correlation, it appears that we are in a period during which oil and the S&P500 have a strong inverse correlation. As I trade the S&P500 intra-day, I see them moving tick for tick in opposing directions. This is probably a short-term phenomenon. Once oil prices find some equilibrium, the markets may remember that one reason why oil has fallen is that there is less demand for it because of the perceived recession; or, other concerns will begin to dominate more than oil prices.

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