This topic has addressed in various threads, but I thought that today is a good day to start this thread. At the time of writing the S&P 500 is at 1,148 or so and WTI crude at $83 or so. The two have experienced a strong positive correlation for the past 12 months. If risk appetite continues to improve, then it's reasonable to expect both US equities and oil to continue to rise. However at some point a "high" oil price will hurt the real economy, and/or hurt equity valuations. What do you think that "high" oil price is? $90? $100?
1) The correlation can break down. 2) You may also want to keep an eye on crude oil versus the dollar.
#1 I agree that the correlation could break down. I should have added to my first post "and assuming the correlation remains in tact". #2 With regards to "crude oil versus the dollar", I assume you mean crude oil (in US Dollars) versus $DXY? If so, it appears that inverse correlation has weakened since early December 2009, when EUR and GBP started to fall against the USD. Since December 2009 it appears that crude oil (in US Dollars) is much more strongly correlated with movements in the S&P 500, rather than movements in other fiat currencies, or movements in gold (when measured in US Dollars).
I run a tickchart of the euro ( 53% weighting in the dx) and the dx when trading crude. its very helpfull ( but probably everybody knows that) 100.00 might be the disconnect........i'll just go w/flow until it doesn't work anymore.
Now that you bring that up, Oil it's been more in correlation with the dollar, and every time we have "hopes" of recovery it reacts to it, that's why the correlation with S&P 500, but like someone mentioned in here, at the end prices of high prices of Oil hurt the economy, I read I don't remember in what book,I read but since 1970, every spike of Oil that we had, it's follow by a recession. Once I have find the book I will post the graphs, since they are online. In this days, I believe Oil it's just going up, for the wrong reasons, massive amount of money print. Just my opinion
the S&P 500 also has a pretty good correlation with copper as well. gold has a decent correlation with the swiss franc. i love correlations.
All correlations can break down: 1. During 2008-2009 financial crisis, the S&P and CL correlation was negative; 2. During that period, CL and gold was correlated and both were against dollar; 3. In current period, CL and dollar correlation gets loose. But CL and S&P get close. You'll have to analyze the entire market. In bad time, hard assets (gold and raw materials) are financial hedges against bad economy. In good time, raw materials turn to physical assets in demand in booming economy.
Just a joke. If you get hold of that Russian guy (Sergey Aleynikov) who reportedly downloaded Goldman program codes, how the correlations were built in the trading programs. I figure all the above mentioned correlations were built in. And there are even more than that. This is how traders think and how they trade.
Update 1 April 2010. Obviously people can afford oil at 85 USD per barrel. Today ES June 2010 is at about 1174.25 CL May 2010 is at about 84.75 (high of day 85.10) 1174.25 / 84.75 = 13.85 ratio, for those keeping score. The strong positive correlation continues.
Update 5 April 2010. Obviously people can afford oil at 86 USD per barrel. Today ES June 2010 is at about 1183.50 (high of day 1183.75) CL May 2010 is at about 86.63 (high of day 86.90) 1183.50 / 86.63 = 13.66 ratio, for those keeping score. The strong positive correlation continues.