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Is Wall Street Ignoring Oil’s 3-Year High?

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Wall Street

Between December 28, 2017, and January 4, 2018, our list of US equity indexes had negative correlations with US crude oil February futures.

  • S&P Mid-Cap 400 Index (MID-INDEX) at -69.9%
  • S&P 500 Index (SPX-INDEX) at -25.6%
  • Dow Jones Industrial Average (DJIA-INDEX) at -11.3%

In the trailing week, US crude oil futures rose 3.6% and closed at a three-year high of $62.01 per barrel on January 4, 2018. During this period, the S&P 500 Index, the Dow Jones Industrial Average, and the S&P Mid-Cap 400 Index rose 1.4%, 1%, and 0.9%, respectively.

Non-growth driven factors like OPEC’s production cut and geopolitical factors were mainly behind the rise in oil prices. So, these equity indexes might not have followed oil prices in the short term. The S&P 500 Index, the Dow Jones Industrial Average, and the S&P Mid-Cap 400 Index have energy stocks with a ratio of ~6%, ~9%, and ~3% to their total holdings, respectively.

European equity indexes, the FTSE 100 Index (EWU) (UKX-INDEX) and the CAC 40 Index (EWQ) (PX1-INDEX) had correlations of 66.8% and 23.9% with Brent crude oil March futures in the trailing week. The FTSE 100 Index and the CAC 40 Index rose 1% and 1.4%, respectively. Brent crude oil futures rose 2.9% during this period. The ratio of energy stocks to their entire holdings in these two equity indexes is over 10%.

Often, natural gas–weighted stocks were more correlated to US crude oil compared to natural gas prices. So, fluctuations in natural gas prices might not be as important for these equity indexes in this short term.

SPDR ETFs

Between December 28, 2017, and January 4, 2018, the Energy Select Sector SPDR ETF (XLE) rose 3.5%—the highest among sector-based SPDR ETFs. The Utilities Select Sector SPDR ETF (XLU) fell 2.5%—the most during this period.

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