Crude reality: Oil could crimp rally

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Olivier Lantendorffer | E+ | Getty Images

It's a crude reality for the market: Oil will put an end to the rally. At least, that's what some market participants contend.

"The increase in the WTI oil price is creating too strong a headwind for growth and further equity gains," Encima Global President David Malpass wrote on Wednesday. "We think there will be a pause or retracement in equities until growth prospects improve or oil falls."

Over the course of three weeks, oil has rallied 12 percent to the highest level since March 2012, and Malpass believes that rising oil prices could pose a problem both for consumers and for businesses.

"It's an important cost of doing business, and may undercut profits and business confidence. From the standpoint of the consumer, it acts as a tax increase, reducing the income that could be spent elsewhere," he said.

One of the reasons Malpass is so concerned about the oil rally is the reason behind it.

"Expensive oil brings new negatives," Malpass said, and "this is particularly true when the increase in oil prices is caused more by supply concerns than an increase in demand."

(Read more: Here's when high oil prices could really pinch)

So will rising oil really put the kibosh on stocks?

"History doesn't support this theory," said Jim Iuorio of TJM Institutional Services. "Over the past 10 years, there has been a positive correlation between stock and oil prices."

But Rich Ilczyszyn of iiTrader believes that this misses the point. "There is no question that equities will be able to rally with crude oil," he said. "However, looking at the end of the 2004 to 2008 rally, when crude oil began to punch through $110, we saw the stock rally tire out. As operating costs begin to increase for an extended period of time, this will drain the economy and likely cause a correction in equities."

On the other hand, Iuorio thinks this drain could actually help stocks.

"Increased oil prices can have a significant drag on the overall economy, but this shouldn't hurt the stocks' run, because the main fear of the equity markets is that the Fed will begin to taper asset purchases," Iuorio said. "If the economy begins to slow, that should push back the timetable for the Fed taper, and could actually be a positive for stocks."

(Read more: Has Bernanke perfected balance between hawks and doves?)

Malpass, however, thinks the importance of tapering has been overstated. "We don't think Fed tapering will decide the course of the recovery," he said.

Malpass expects to see "substantial upside possibilities if growth improves," but maintains that "oil prices will have to decline first."

—By CNBC's Alex Rosenberg.

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