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Is Fall in Oil Limiting Wall Street’s Upside?

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Correlations

Between October 5 and October 12, 2017, US equity indexes had positive correlations with US crude oil prices. The correlations are listed below:

  • The S&P 400 Mid-Cap Index (IVOO) is at 50.1%.
  • The S&P 500 Index (SPY) is at 69.6%.
  • The Dow Jones Industrial Average Index (DIA) is at 73.3%.

Both the S&P 500 Index and the S&P 400 Mid-Cap Index were almost flat in the trailing week. The Dow Jones Industrial Average rose just 0.3% during this period. US crude oil futures fell 0.4% during this period.

So, based on the correlations, US crude oil could have limited these three US equity indexes’ upside. The FTSE 100 Index (EWU) and the CAC 40 Index (EWQ) had correlations of -11.4% and 72.3% with Brent crude oil active futures, respectively. The FTSE 100 Index rose 0.6%, while the CAC 40 Index fell 0.3% in the past five trading sessions. The CAC 40 Index returns were aligned to a 1.3% fall in Brent crude oil futures during this time period.

Energy stocks constitute 6% to 7% of both the S&P 500 Index and the Dow Jones Industrial Average Index and 3% to 4% of the S&P 400 Mid-Cap Index. However, for the FTSE 100 Index and the CAC 40 Index, the allocation to energy stocks is over 10%.

In the short term, natural gas prices could have a limited influence over these equity indexes because the natural-gas-weighted stocks have tended to ignore movements in natural gas prices.

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SPDR ETFs

The Energy Select Sector SPDR ETF (XLE) fell 0.7% between October 5 and October 12, 2017. During this time, the Utilities Select Sector SPDR ETF (XLU) rose 2% and outperformed our list of sector-based SPDR ETFs. The Consumer Discretionary Select Sector SPDR ETF (XLY) fell 0.9% and underperformed our list of sector-based SPDR ETFs.

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