What’s Making Wall Street Weak?



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

Last week, US crude oil (USO) (OIIL) (USL) (SCO) May futures fell 2.7%. Natural gas April futures rose 4.3%. The broad market S&P 500 Index (VFINX) (SPY) (SPX-INDEX) fell 1.3% during the same week. The Dow Jones Industrial Average (DIA) (DJIA-INDEX) fell 1.5%, while the technology-heavy NASDAQ Composite (COMP-INDEX) (QQQ) fell 1.2% during the same period.

The Energy Select Sector SPDR ETF (XLE) fell 1.8% from March 17–24, 2017. It was the second-largest loser among the sector SPDR ETFs. The fall in XLE corresponds to the fall in oil prices.

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Among the SPDR ETFs, the Utilities Select Sector SPDR ETF (XLU) rose the most, rising ~1.5% from March 17–24, 2017. Utilities outperformed after the Fed signaled it would keep the pace of its interest rate hikes gradual. Remember, utility stocks tend to perform inversely to interest rates. On the other hand, it’s also what caused the Financial Select Sector SPDR ETF (XLF) to underperform. XLF fell 3.7% over the same time period. Financials tend to gain from higher interest rates. The returns of the above SPDR ETFs are adjusted for dividends.

For a deeper analysis of how the sector SPDR ETFs performed last week, read Wall Street Bulls Should Fear Oil’s Downturn.

Correlations of crude oil and S&P 500

Last week, the S&P 500 Index closed at 2,343.98. 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 in none of the instances.

The correlation between crude oil and the S&P 500 was 65.0%. The correlation between natural gas and the S&P 500 was -46.5%. 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


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