Question for the Day: What if Correlation between Crude and Stocks Changes

I re-posted a couple of Crude Oil calls from my December archives today. Not to toot my own horn but because it seems that there is a view that if Crude Oil stays over $110 per barrel that the S&P 500 (ticker$SPY) cannot sustain its lofty levels. Oil from a technical perspective can still run much higher. From the linked articles below the technicals suggest 120 short term and as much as 148 – 167 longer term. Stock prices may fall but look at the price history.

The ratio of the SPY to West Texas Intermediate Crude had been in a symmetrical triangle since June of 2009 with a center line near 1.44. The widest part of the triangle was 0.50, when the top rail was at 1.70 and the bottom at 1.20. On February 22, 2011 it cracked the triangle and has been falling ever since. In rough terms it has now fallen 0.24 from the center line, half of the anticipated move off of this pattern. Wow, this must be hurting the long SPY holders, right? Actually with the SPY at 133 it is up over 3% since this move began.

Two points to make here:

1. Trade what the price action gives you for whatever market or security you are trading.
2. Do not rely on convention economic thinking and correlations to go on unchanged for ever.

I am long Oil via the $USO and I am a long stocks that have good setups. I suggest you look at things similarly.

From December 1, 2010 Oil is About to Become the New Gold

From December 21, 2010 Looking Ahead: Crude Oil & Natural Gas

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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