Oil And Equities: Recent Correlation Worth Watching To See If It Lasts

The question Thursday is, will the stock market track crude oil, as it’s done over the last week; or trade independently from crude, the longer-term pattern? Early on, both crude oil and S&P 500 futures were lower.

Over the last five days, crude and E-mini S&P 500 futures have displayed a sky-high 96% correlation. That’s in contrast to the last 60 days, in which the two had a negative-16 correlation. It could be interesting to watch in coming days if the strong recent correlation continues, or if crude and the S&P 500 index go back to trading as they did earlier this fall. We’ll see if the stock market continues to take its direction from crude, as it did so often last winter.

Overseas central banks are back in the news, as the European Central Bank (ECB) met Thursday and kept interest rates unchanged. That was in line with analysts’ expectations going into the meeting. Investors might want to watch to see what ECB President Mario Draghi, who speaks today, has to say about the future of the ECB’s bond-buying program. Inflation in Europe has recently gained a little steam, perhaps a sign that stimulus is having an effect. The ECB said Thursday that it expects rates “to remain at present or lower levels for an extended period of time.” It confirmed that its large-scale asset purchase program is planned to “run until the end of March 2017, or beyond, if necessary,” media reports said.

The earnings parade continued Wednesday night and early Thursday, with reports from companies including Verizon Communications Inc. VZ, American Airlines Group Inc AAL, and eBay Inc EBAY, among others. Shares of VZ and EBAY fell after they reported, as investors digested VZ’s somewhat lighter-than-expected revenue and an outlook from EBAY that didn’t reach analysts’ consensus predictions, media reports said. Microsoft Corporation MSFT is one of the big companies reporting today after the close.

There was another hawkish Fed speech last night, as New York Fed President William Dudley predicted a rate hike if the economy continues to perform as it has recently. "If the economy stays on its current trajectory I think ... we'll see an interest rate hike later this year," Dudley told a dinner gathering, Reuters reported.

Amid the earnings deluge, data from the government Wednesday suggested the housing market remains strong. Single-family housing starts, which account for the largest share of the residential housing market, jumped 8.1 percent to a 783,000-unit pace in September. That was the highest level since February

October is often a volatile month, historical data show, and presidential elections also typically create some choppiness. The CBOE’s VIX futures remain up from September, but don’t reflect a market that’s too nervous, at least by historic standards. The VIX stood at 14.21 early Thursday, down from highs above 17 earlier this week and below the long-term average.

Crude Oil Keeps On Flowing…Away: Though U.S. crude oil stockpiles remain near the upper limit of the average range for this time of year, inventories dropped by 5.2 million barrels during the week ended Oct. 14, the U.S. Energy Information Administration (EIA) said Wednesday. The news initially boosted crude oil futures to new one-year highs above $51 a barrel. The steady dribble of oil out of storage seems to defy historic precedent during what typically is a supply-building season, and may be boosting the energy sector, which roared to better than 1% gains Wednesday after the report. Halliburton Company HAL, which reported stronger than expected results this week, said it expects an increased commodity price to raise rig counts in North America. “Things are getting better for us and our customers,” HAL noted in its earnings release. Schlumberger Limited SLB, another big energy company, reports after Thursday’s close. Oil prices fell slightly early Thursday.

Want Fries with that Light Bulb? McDonald’s and GE Earnings Ahead: Friday morning could be interesting for investors who follow two U.S. stalwarts: McDonald’s Corporation MCD and General Electric Company GE, both of which report before the open. Each comes into Friday with their stocks displaying signs of weakness, as MCD recently fell to a new low for the year and is down more than 5% year to date. GE is down about 7% year to date. The focus going into MCD earnings is partly on how it’s handling the so-called “restaurant recession,” or even if such a recession exists. Stay tuned to hear what MCD executives say about that in their earnings call. MCD is expected to report EPS of $1.48, according to Briefing.com, up from $1.40 a year ago. GE, a huge company whose product performance can help investors get a better worldview into the broader economy, is expected to report EPS of 30 cents, down from 32 cents a year ago, Briefing.com said. Investors may want to monitor GE’s guidance to see if it’s affected by some challenges to GE’s core businesses.

TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2016 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.