The following is a reprint of our May 25th blog posting entitled Oil Prices’ Effect On The Stock Market: Conventional Wisdom vs. Reality. I thought it may be of special interest today with NYMEX crude oil trading below $80 per barrel for the first time since October 2011.
Back in February the attention of the financial media was focused on $110 per barrel oil prices, the prospects for even higher prices heading into the summer driving season, and the presumed devastating effect that this would have on the US economy and the stock market.
Instead, NYMEX crude oil surprised a lot of people by peaking on March 1st and subsequently collapsing by almost $9 per barrel or 8% by the end of March. Conventional wisdom suggested that this should have been great for the stock market. You know, cheaper oil, lower transportation costs, the whole fundamental argument.
But it wasn’t. The S&P 500 peaked on April 2nd, and has since declined by 130 points or 9% into last week’s lows. Meanwhile, oil prices have continued to decline, by another 13% into this week’s lows — or a total of $23 per barrel or 20% from the early March highs.
Separating “conventional wisdom” from how asset prices actually interact with one another in real time is critical when trying to anticipate upcoming financial market direction — commonly known as investing. Our April 11th report, entitled Breakdown In XLE Portends More Upcoming Weakness For Energy & US Broad Market, spoke directly to this point and helped us to not only get in front of the recent bearish reversal in oil prices, but also the current US stock market decline.
The following (green highlights) is a brief excerpt and a chart from that April 11th report. Asbury Research subscribers can view the entire report by logging into our Research Center via the big gold button at the upper right corner of this page.
Asbury Research’s Asbury Alert
Breakdown In XLE Portends More Upcoming Weakness For Energy & US Broad Market
Wednesday, April 11th, 2012
In our Tuesday February 21st report entitled Crude Oil: Our $105.00 Target Has Been Met, we pointed out a bullish chart pattern in the Energy Sector SPDR ETF (XLE) initiated in early January that targeted an additional +5% advance. We said that as long as the pattern remained intact, there still should be more upside to the October 2011 advance in energy-related asset prices.
Chart 1 below shows that this pattern, indicating a bullish breakout from sideways indecision by investors during Q4 2011, was “broken” on April 10th by closing below its 68.74 January 12th low.
This week’s collapse in XLE, which indicates that the market has collectively changed its mind on the direction of energy-related asset prices, indirectly portends upcoming weakness in the AMEX Oil Index and in the broader S&P 500.
There is no doubt that a sustained period of lower oil and energy prices will eventually have a positive financial effect on companies’ bottom line — as well as their share prices. But, from an investing standpoint, eventually can be an expensive word.
Since our April 11th report, XLE (which is also positively correlated to oil prices) has declined as expected by another 5.53 points or 8%. Meanwhile, NYMEX crude oil has declined by $15 per barrel or 14% while the S&P 500 has coincidentally declined by 83 points or 6%.
Real world, crude oil prices and the S&P 500 have actually been positively correlated to one another since the US stock market peaked in October 2007. So, from an investment standpoint, the economic demand (or lack thereof) that oil prices represent has a much more immediate effect on US stock market direction than does oil prices’ effect on operating costs and the bottom line.