Crude Oil and Stocks: Another Changing Relationship

To more directly assess the impact of crude oil prices on stocks, I took a look at West Texas Intermediate cash crude prices vs. the cash S&P 500 Index. Going back to March, 2003 (N = 784), I examined two-day performance in crude vs. near-term subsequent performance in SPX.

When crude rose by 4% or more in a two-day period, next day S&P performance was not affected, but performance over a three-day period averaged .04% (39 up, 36 down). That's weaker than the average three-day gain of .18% (447 up, 337 down) for the sample overall.

When crude fell by 4% or more in a two-day period, next day S&P performance also was not affected. Performance over the next three days, however, averaged .46% (41 up, 23 down), stronger than the average gain for the sample.

It thus appears that short-term weakness in oil is associated with a bounce in stocks, and short-term strength in oil is associated with stock underperformance.

Once again, however, there is a caveat. Since June, 2005, these relationships have not held. The S&P three-day performance has been tepid following two-day periods of oil strength *and* weakness. My interpretation is that stocks of late have been less reactive to oil price changes than they had been earlier in the bull market. Perhaps this is a sign that we have adapted to what earlier were seen as dangerously elevated oil prices.

In any event, I continue to find evidence that intermarket relationships are changing, creating a shift in dynamics from the early phase of the bull market. New regimes are emerging, and those who jump aboard the new relationships early might be well positioned to profit.