Why Rising Oil Is Failing to Reassure Wall Street Bulls

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

Between April 7 and April 13, 2017, US crude oil (USO)(OIIL)(USL)(SCO) May futures rose 1.8% while natural gas May futures fell 1%. The broad market S&P 500 Index (VFINX)(SPY)(SPX-INDEX) fell 1.1% during the week.

Why Rising Oil Is Failing to Reassure Wall Street Bulls

The Energy Select Sector SPDR ETF (XLE) fell 1.5% between April 7 and April 13, 2017. It was the fourth-largest loser among the sector SPDR ETFs. The fall in XLE despite the rise in crude oil because of the 1.3% fall in ExxonMobil (XOM) and 2.5% fall in Chevron(CVX). Together, these two stocks account for ~31.9% of XLE

Among the SPDR ETFs, the Utilities Select Sector SPDR ETF (XLU) rose the most, gaining ~0.5% between April 7 and 13, 2017. The returns of the SPDR ETFs are adjusted for dividends.

Correlations of crude oil and the S&P 500 Index

Last week, the S&P 500 Index closed at 2,328.95. In the past four trading sessions, crude oil and the S&P 500 Index moved in the same direction two times on a closing price basis. Natural gas and the S&P 500 Index moved in the same direction in only one instance.

The correlation between crude oil and the S&P 500 was 74.2% while the correlation between natural gas and the S&P 500 was -68.2% during the week. 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 price movements. Energy accounts for 6.6% of the S&P 500 Index.

Correlations of crude oil and other major equity indexes

Between April 7 and 13, 2017, the correlation between crude oil and the S&P 400 Midcap (IVOO)(MID-INDEX) index was 76.8%. The S&P 400 Midcap Index had 3.4% exposure to the energy sector. The Dow Jones Industrial Average (DIA)(DJIA-INDEX) index had a correlation of 59.4% with crude oil during this time 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 54.1% and -55.6%, respectively, with crude oil during this time 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 sentiment in natural gas–heavy stocks.