The S&P 500 can buy 61 barrels of oil

The stock market is buying you more these days. More oil that is.

The crash in crude prices could be edging the door open to a bullish move in the stock market. Although equities have come down in recent weeks, the long stocks/short oil trade has been a winner since the third quarter of 2015 ... and could have room to keep going.

Based on closing prices Tuesday, the S&P 500 was at 1,904. A barrel of oil was 31.4. That means the price of the S&P 500 index could buy 60.6 barrels of oil. But at the rate we're going, the trend could continue — higher stock prices relative to lower oil prices.

Here's a chart of the short-term trend:

You can see the gradual increase as we keep going up. Each new low is higher than the previous one. Just in the last couple years that ratio was under 20, and under 12 less than five years ago.

The question now is how far can it go up. If recent history is any indication, the answer is possibly over 100. Look at the stock market boom of the late 1990s, where one instance of the S&P 500 index could buy more than 100 barrels of oil.

Hedge fund traders look at ratios like this when making a direct comparison between two different securities or asset classes, as a way of finding relative value trade opportunities between asset classes. It's simpler and more effective to do it this way rather than try to compare two separate charts of oil and stocks. Putting it into one ratio brings the story home neatly.

And right now that story is: The stock market should continue to outperform oil for a while.

Notice there was a period of resistance when the ratio hit the 80-90 area. This would be the next logical place for the markets to expect some type of turnaround. For example, you could see a ratio of 80 if the S&P 500 were at 2,000, and crude oil futures were 25. Numbers like that are very possible.

— With additional reporting from CNBC's Pradip Sigdyal.

‹

• The oil-stocks correlation could be about to break
• VIX vs oil price could trigger a major signal

›