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Why oil may hold the key to the market’s next move

With crude prices dipping below $40 a barrel, it may take an oil reversal for stocks to make a big move higher.

"It would be very helpful to have oil bottom here in order to have stocks break out to the upside," Nick Colas, chief market strategist at Convergex, said on CNBC's "Trading Nation" on Friday. On Monday, oil fell below $40 a barrel for the first time since April.

"We have seen correlations kind of grind their way higher again, and they're not really overly high. But they have been climbing with the moves in oil tracking the S&P."

Energy makes up 8 percent of the S&P 500 and is currently one of the worst-performing sectors in the index. Crude oil and the S&P 500 have seen a correlation of 0.5 over the past 60 sessions, indicating a relationship that is a bit tighter than it has been on average over the past few years.


Given the way the market is performing, Colas said he thinks energy is still a good place to be as he sees oil in the process of bottoming out at around its current levels. "Against that backdrop the energy sector is a good place to put money," he said.

However Eddy Elfenbein, editor of the Crossing Wall Street blog, said he doesn't think it's necessary for oil to bottom out and go higher for stocks to perform well. "Given the correlations, it's possible to move higher without energy conforming," he said.

Elfenbein said he remains a bit more cautious on energy, especially the larger names. "Overall I'm not that optimistic for the sector."

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Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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