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Why Oil Could Halt the Broader Market’s Recovery

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US equity indexes

Between August 2 and August 9, US equity indexes had the following correlation readings with September US crude oil futures follow:

  • the Dow Jones Industrial Average (DIA): 40.1%
  • the S&P 500’s (SPY): 44.1%
  • the S&P Mid-Cap 400’s (IVOO): 80.5%

DIA, SPY, and IVOO have energy sector exposures of ~5.5%, ~6.3%, and ~5.3%, respectively, and they have risen 0.7%, 0.9%, and 0.6% in the trailing week. September US crude oil futures have fallen 3.1% during this period.

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Why oil could halt the broader market’s recovery

Based on their correlation levels, these equity indexes might have been influenced by oil prices. Between August 2 and August 9, the Energy Select Sector SPDR ETF (XLE) fell 1.1%. This was the largest decline among the SPDR ETFs that break down the broader market into subsectors.

The fall in oil prices in the trailing week may have been the most important factor behind XLE’s decline and may have limited the upside in these equity indexes. If oil prices fall further, these equity indexes may be hampered.

In the past five trading sessions, the Communication Services Select Sector SPDR ETF (XLC) has risen 2.3%—the greatest increase among our list of SPDR ETFs.

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