Oil and stocks sometimes trend together. Other times, they don’t.
There’s a widespread belief that rising oil prices are bearish for the main stock indexes and falling oil prices are bullish for stocks.
That belief is reflected in this Sept. 5 CNBC headline:
Dow closes nearly 200 points lower as rising oil prices drag down stocks …
But wait a minute, the broad stock market rallied in July as the price of crude oil was also climbing.
Getting back to the same financial website, an Aug. 1 headline said (CNBC):
Oil joined the July stocks rally …
Going further back this year, an April 14 Barron’s headline noted:
Oil Prices and Stocks Have Rallied …
These cases here in 2023 are by no means the first time that the behavior of the oil and stock markets have defied conventional wisdom.
Here’s a chart and commentary from Robert Prechter’s landmark book, The Socionomic Theory of Finance.
The July 25, 2006 issue of The Elliott Wave Theorist offered [this chart], showing the preceding three-year market environment. Examine it and see if you can discern any indication whatsoever that lower oil prices make stocks rise or vice versa. As I said at the time, “Oil and stocks have trended mostly in the same direction for more than three years.
And, as you can see from this next chart, stocks and oil also crashed together for much of 2008 going into 2009. And then rose together — again, with crude oil tripling in value as the S&P 500 index doubled in value.
So, maybe rising oil prices do not “make” stocks fall after all (and vice versa.)
Every market has its own investor psychology that drives it. You may want to look to the Elliott wave model for a high-confidence ascertainment of the oil and stock markets independently from each other.
If you want to delve into the details of Elliott wave analysis, an ideal resource is Frost & Prechter’s book, Elliott Wave Principle: Key to Market Behavior. Here’s a quote from this Wall Street classic:
After you have acquired an Elliott “touch,” it will be forever with you, just as a child who learns to ride a bicycle never forgets. Thereafter, catching a turn becomes a fairly common experience and not really too difficult. Furthermore, by giving you a feeling of confidence as to where you are in the progress of the market, a knowledge of Elliott can prepare you psychologically for the fluctuating nature of price movement and free you from sharing the widely practiced analytical error of forever projecting today’s trends linearly into the future. Most important, the Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress.
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