Is Wall Street Ignoring Oil’s Gains?

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

Between May 11 and May 18, 2017, the S&P 500 Index (VFINX) (SPY) (SPX-INDEX) fell 1.2%. During the same period, US crude oil (USO) (OIIL) (USL) (SCO) July futures rose 3%, while natural gas (BOIL) June futures fell 5.7%.

Is Wall Street Ignoring Oil’s Gains?

SPDR ETFs

However, between May 11 and May 18, 2017, the Energy Select Sector SPDR ETF (XLE) fell 1.1%. It was the fifth largest loser among the sector-based SPDR ETFs. In the next part, we’ll discuss the correlation of XLE ETFs with US crude oil and natural gas.

Among the SPDR ETFs, the Utilities Select Sector SPDR Fund (XLU) gained the most. XLU rose ~0.8% between May 11–May 18, 2017. The returns of the SPDR ETFs are adjusted for dividends.

Correlations of crude oil and the S&P 500 Index

The S&P 500 Index closed at 2,365.72 on May 18. Between May 11 and May 18, crude oil and the S&P 500 Index moved in the same direction four times on a closing price basis. Natural gas and the S&P 500 Index also moved in the same direction in two instances. Energy companies account for 6.6% of the S&P 500 Index.

However, the S&P 500 Index had a correlation of just 11.4% with crude oil, while it had a correlation of -5.3% with natural gas during the trailing week.

Correlations of crude oil and other major equity indexes

Below are the correlations of other major equity indexes with crude oil between May 11 and May 18, 2017:

  • S&P 400 Midcap Index: 24.2%
  • Dow Jones Industrial Average Index: 5%
  • FTSE 100 Index: -34.4%
  • CAC 40 Index: -0.1%

The energy sector accounts for 3.4% of the S&P 400 MidCap Index (IVOO) (MID-INDEX), ~6.4% of the Dow Jones Industrial Average (DIA) (DJIA-INDEX), 14.1% of the FTSE 100 Index (EWU) (UKX-INDEX), and 11.6% of the CAC 40 Index (PX1-INDEX) (EWQ).

Market sentiments could also be an important factor in understanding how markets move. For example, bearishness in the crude oil market can cause equity markets to slump and vice versa.