Wall Street Bulls: Be Cautious about Energy
Crude oil, natural gas, and the S&P 500 Index
Last week, US crude oil (USO) (OIIL) (USL) (SCO) May futures rose 0.60%, while natural gas April futures fell 2.0%. The broad market S&P 500 Index (VFINX) (SPY) (SPX-INDEX) rose 0.20% during the same week. The Dow Jones Industrial Average (DIA) (DJIA-INDEX) rose 0.10%, while the technology-heavy NASDAQ Composite (COMP-INDEX) (QQQ) rose 0.70% during the same period.
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The Energy Select Sector SPDR ETF (XLE) rose 0.30% from March 10–17, 2017. It was the second-smallest gainer among the sector SPDR ETFs. The small rise in XLE corresponds to the marginal rise in oil prices.
Among the SPDR ETFs, the Utilities Select Sector SPDR ETF (XLU) rose the most. It rose ~1.3% from March 10–17, 2017. Utilities outperformed after the Fed signaled that it would keep the pace of its interest rate hikes gradual. Remember, utility stocks tend to perform inversely to interest rates. For a deeper analysis of how the sector SPDR ETFs performed last week, read Oil’s Comeback, and Why It Matters to Wall Street Bulls.
Last week, the S&P 500 Index closed at 2,378.3. In the past five trading sessions, crude oil and the S&P 500 Index moved in the same direction three times on a closing price basis. Natural gas and the S&P 500 Index moved in the same direction four times.
In the last five trading sessions, the correlation between crude oil and the S&P 500 was 96.3%. The correlation between natural gas and the S&P 500 was 60.6%. However, the correlation between natural gas and the S&P 500 during that short period isn’t useful because natural gas–weighted stocks are less aligned to natural gas’s price movements.
However, the sentiment in the broader financial and commodity markets globally could impact securities and commodities across the markets. In the past, a weakness in the crude oil market caused equity markets to fall due to fear.
It’s worth noting that the energy sector accounts for ~7.6% of the S&P 500 Index and ~6.4% of the Dow Jones Industrial Average, but just ~0.90% of the NASDAQ Composite. Movements in energy prices can also directly sway the broader market index. The recent relative weaknesses in energy stocks would have limited the gains in the broader market.