Thursday, July 11, 2013

About Those High Oil Prices Hurting Stocks…..

by Greg Harmon

There are many market adages that have grown a life of their own over time. Sell in May and Go Away. A strong Dollar is Bad for Stocks. Gold is a hedge against Inflation. Gold is a store of Value in a Crisis. Most, if not all of them can be proven false if people just looked at the price data before opening their mouths. So now that West Texas Intermediate Crude ($CL_F) is breaking higher as stocks have been in a bit of a pullback or range, let me give you that opportunity to look before you speak. The chart below shows a lot of things. The main picture is the ratio of Crude Oil to the S&P 500 ($SPX), over the last 10 years. In the lower panels are individual charts of the S&P 500 and Crude Oil over that period. This chart tells a very interesting story. Outside of the period shaded in blue, both the S&P 500 and Crude Oil have been


rising in price at the same time. That is 8 of the last 10 years. In fact what looks to be the problem in this relationship in the blue shaded area is as a result of hyper growth in Crude Oil prices. There are many reasons that this can happen including War, a distinct possibility in the Middle East now, so it is right to be cautious about the relationship between Crude Oil and Stocks. But history shows, as plain as the price action, that rising Crude oil Prices are not a a bad omen for stock prices. If one were to draw a correlation then they should instead reach the opposite conclusion, that rising Oil Prices are good for Stock Prices. So there is your preemptive strike. Now count how many pundits and analyzers misstate the obvious as Oil continues to rise.

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