Oil and Stocks: Does One Lead the Other? Examining the Evidence

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Oil and Stocks: Does One Lead the Other? Examining the Evidence
Just what IS the correlation between stocks and oil? See eye-opening answer below

By Vadim Pokhlebkin
Thu, 29 Mar 2012 17:15:00 ET

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The stock market closed lower on March 28, and the headlines were there to explain why: falling oil prices.

"Wall Street slid deeper into the red as traders reacted to sinking oil prices and weaker-than-expected data on the US manufacturing sector." (Fox Business, March 28)

The notion that oil and stock prices are linked is everywhere. Usually it's a negative link, as in oil falls, stocks rise. But as we see above, sometimes the "explanation" claims falling oil is "bearish" for stocks.

The truth is simple: the link between stocks and oil does not exist.

Here's part of the evidence Robert Prechter presented in his March 2010 Elliott Wave Theorist:

It would take weeks to collect all the statements that economists have made to the press to the effect that recently rising oil prices are “a concern”... For many economists, the underlying assumption about causality in such statements stems from the experience of 1973-1974, when stock prices went down as oil prices went up. Figure 7 shows, however, that for the past 15 years there has been no consistent relationship between the trends of oil prices and stock prices. Sometimes it is positive, and sometimes it is negative.

In fact, during this period it has been positive for more time than it has been negative! And the quarters during this period when the economy contracted the most occurred during and after the oil price collapse of 2008. Thereafter oil prices doubled as the economy was reviving in 2009. This graph negates all the comments from economists who say that an “oil shock” would hurt the stock market and the economy. It also throws into doubt the very idea that stock prices and oil prices are linked.

So, if you cannot predict what stocks will do by looking at oil -- or vice versa -- then how can you forecast those two markets?

Elliott wave analysis can help. Our own Energy Specialty Service, for example, brings subscribers a nightly forecast plus the intraday updates as crude oil trades. Here is one of the March 29 intraday charts (some Elliott wave labels have been erased for this article):

NYMEX Crude (Intraday)

Posted On: Mar 29 2012 1:54PM ET / Mar 29 2012 5:54PM GMT

Last Price: 102.35

As you can see, oil prices have been moving sideways in a choppy, overlapping manner. That's the very definition of an Elliott wave correction -- what you see labeled (w)(x)(y) in the chart above.

The next move in oil is likely to be explosive. Our Energy Specialty Service tells you right now in which direction, and how far, prices are likely to go.

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Tags: crude oil, Elliott wave, Robert Prechter, S&P 500, U.S. STOCK MARKET

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