Trading Nation

Breaking up? No, oil & stocks are closer than ever

Will oil drive stocks to record highs?

Over the past 10 sessions, oil and the have moved in opposite directions as often as they've risen or fallen together.

This may tempt some to conclude that the market has ceased to be so reliant on oil. But such wags should know that a handful of sessions does not a trend reversal make. And when those sessions are considered within the context of recent history, a different picture emerges.

To wit: The 60-session correlation between crude and the S&P rose to 0.62 on Tuesday. That's the highest the measure has been since September 2012.

Many things impact the S&P's moves, of course. But oil appears to have outsized influence.

Over the course of 2016, the correlation between the daily moves of oil and the S&P has been 0.56. That compares with 0.46 for the S&P and the 10-year Treasury yield, and 0.21 for the S&P and the dollar index. (Correlations run from -1 to 1, with 0 indicating no relationship, and 1 indicating perfect concert.)

What's striking is how much more closely oil and stocks have been trading over the past 60 sessions versus the 60 previous sessions. The correlation has doubled.

As the chart above shows, correlations change over time, so it would be folly to expect the relationship between crude and stocks to be maintained.

However, those who say that oil and stocks are breaking apart merely because they've moved in different directions in recent days may be jumping to a conclusion.