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Oil And Stocks: The "Correlation" Breaks Down
When oil goes down, do stocks really go up?

By Vadim Pokhlebkin
Wed, 03 Sep 2008 17:00:00 ET
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September 2 was the first day of trading after the long Labor Day weekend, and the DJIA opened with a sharp gap up.

 
That same morning, crude oil started the day with a sharp drop.
 
So what, you ask? Isn't that how it's supposed to be – when oil goes down, stocks go up? Market analysts repeat this "rule of thumb" every day, in print and on TV – so it must be true.
 
They do, indeed. But does saying it make it so? Consider this:
 
"Most pundits were talking mainly about oil this morning [Sept. 2], which was extremely volatile. They tried to explain the strongly higher stock market open by the fact that oil prices were down big. By the end of today’s session very few market observers talked about oil and stocks together.
 
"The reason: both ended today’s market session DOWN, once again showing that the supposed negative correlation between the two asset classes is ephemeral (see Stocks and Oil chart on p.6 of the September Elliott Wave Financial Forecast). If these trends continue, pretty soon pundits will be trying to make the case that lower oil is BEARISH for stock prices. Just wait."
 
– Elliott Wave International, Short Term Update, Tuesday, September 2, 2008, 4:30 PM Eastern.
 
"Just wait," indeed. If oil drops below $100 (a scenario EWI's Energy Specialty Service considers highly probable), can you imagine news headline like these, for example?
 
"Stocks Fall As Continued Declines In Crude Indicate Slowing Consumer Demand"
 
Or,
 
"Shares of Energy Companies Drag Stocks Down"
 
If you want a market indicator that doesn't change with the wind, try Elliott wave analysis. For starters, see that "Stocks and Oil" chart on page 6 of the new, September issue of The Elliott Wave Financial Forecast. You can see it risk-free, online, right now – here's how.
 

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Tags: DJIA, Crude oil, Stocks

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The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.