The Oil Disconnect From The Market

• Posted by TheArmoTrader
• on September 19th, 2012

Historically, we know that oil ($CL_F) is positively correlated with the market ($SPX). If we are in a risk-on scenario, then oil is bid up with the market and if oil sells off, you expect oil to go down with it. This has caused some problems to the market every-time we have gotten above that $100 level for the past couple of years. However, something different has been happening for the past few months. Oil is disconnecting from the market.

I saw two interesting tweets over the past few days that relates to this topic.

Josh Brown:

I forget which we’re rooting for this week – is crude plummeting great for the consumer or a bad economic sign? $$

— Downtown Josh Brown (@ReformedBroker) September 19, 2012

 

Gregor Macdonald:

It’s getting harder to discern useful recession signals in the US from its own oil demand, which topped out starting in 2004/2005.

— Gregor Macdonald (@GregorMacdonald) September 18, 2012

 

So, are we rooting for the decline in crude (thus hinting at a possible structural change in the economy away from oil), or is this a bad sign for the economy, that there has been such a major disconnect in crude prices (and thus a tell for the market that this is a cyclical slowdown)?

 

$SPX (dotted) vs $CL_F (solid black)
As you see, over the past 3 years, the prices of the market and oil closely follow one another, however, over the past few months, the price of oil has lagged the market pretty noticeably.

 

 

Tags: $MACRO $CL_F $USO $SCO $UCO $SPX 

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