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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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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