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Oil & Stocks Have Decoupled, But Daily Returns Remain Correlated

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Oil & Stocks Have Decoupled, But Daily Returns Remain Correlated

For most of the past year, the S&P 500 and WTI crude oil prices have traded hand-in-hand. That correlation seems to have broken down since early June. The S&P 500 has surged higher to new highs, while WTI crude prices have pulled back to their lowest level in more than two months.

Both oil and stocks started off 2016 on shaky ground, hitting 2016 lows back in February. Since then, both have rebounded nicely and entered the summer season at their high points for the year. However, in the past month, the United States Oil Fund LP (ETF) (NYSE: USO) is down 11.7 percent, while the SPDR S&P 500 ETF Trust (NYSE: SPY) is up 6.7 percent.

Related Link: What's Driving Oil's Ongoing Weakness?

Strangely enough, according to Portfolio Visualizer, the daily return correlation between the USO and the SPY since July 9 remains relatively strong at 0.55. In fact, that daily return correlation is even higher than the 0.45 correlation between the two ETFs in the previous year when oil and stocks seemed to be so synchronized.

The correlation between stocks and oil is nothing new. In fact, the USO and the SPY share a relatively strong 0.43 daily return correlation over the past decade.

Disclosure: the author holds no position in the stocks mentioned.

 

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