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Should Oil Bulls Be Concerned?

PART:
1 2 3 4 5
Part 3
Should Oil Bulls Be Concerned? PART 3 OF 5

Crude Oil Helped Wall Street Reach New Historic Highs

Crude oil, natural gas, and the S&P 500 Index

Between April 28 and May 5, 2017, US crude oil (USO) (OIIL) (USL) (SCO) June futures fell 6.3% and natural gas (BOIL) June futures fell 0.3%. The broad market S&P 500 Index (VFINX) (SPY) (SPX-INDEX) rose 0.6% during the week.

Crude Oil Helped Wall Street Reach New Historic Highs

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The Energy Select Sector SPDR ETF (XLE) fell 0.8% during the same period. It was the only loser among the sector SPDR ETFs. The Financial Select Sector SPDR ETF (XLF) rose the most. XLE rose ~1.3% between April 28 and May 5, 2017. The SPDR ETFs’ returns are adjusted for dividends.

Although the S&P 500 Index was already up for the week, despite losses in the energy sector, a bounce in crude oil and natural gas at the end of the week helped the broad market index hit a new record high.

Correlations of crude oil and the S&P 500 Index

Last week, the S&P 500 Index closed at 2,399.29—a closing record high. In the past five trading sessions, crude oil and the S&P 500 Index moved in the same direction only one time on a closing price basis. Natural gas and the S&P 500 Index also moved in the same direction in one instance. Energy accounts for 6.6% of the S&P 500 Index.

The correlation between crude oil and the S&P 500 was 33.8%, while the correlation between natural gas and the S&P 500 was 32.5% during the week. The S&P 500’s positive correlation with crude oil shows the link between the two. The positive correlation between natural gas and the S&P 500 isn’t as useful. Natural gas–weighted stocks are less aligned with natural gas price movements.

Correlations of crude oil and other major equity indexes

Between April 28 and May 5, 2017, the correlation between crude oil and the S&P 400 MidCap (IVOO) (MID-INDEX) index was 9%. The S&P 400 MidCap Index has 3.4% exposure to the energy sector. The Dow Jones Industrial Average (DIA) (DJIA-INDEX) index had a correlation of 14.2% with crude oil during that period. The energy sector accounts for ~6.4% of the Dow Jones Industrial Average.

Among major world equity indexes, the FTSE 100 Index (UKX-INDEX) (EWU) and the CAC 40 Index (PX1-INDEX) (EWQ) had correlations of 2.9% and -17.9%, respectively, with crude oil during the same period. Oil and gas companies account for 14.1% of the FTSE 100 Index and 11.6% of the CAC 40 Index.

Sentiment in one market can impact securities and commodities in other markets. In the past, weakness in the crude oil market caused equity markets to fall and vice versa. Crude oil can also drive sentiments in natural gas–heavy stocks.

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