(…) we clearly see that the XOI and the S&P 500 have moved roughly in the same direction in the recent years (…) a strong positive correlation remains in place also on a short-term basis.
Since that essay was published, both indices have moved higher and hit fresh annual highs. They have also broken above their psychological barriers – 1,500 in case of the oil stock index and 1,800 in case of the S&P500. Taking this fact into account, we‘ve decided to examine the relationship between the general stock market and crude oil to check if it confirms or invalidates the conclusions of the analysis of the oil-stocks-to-oil ratio.
Let‘s begin with the long-term chart (charts courtesy by http://stockcharts.com).
Similarly to what we saw in the case of the oil-stocks-to-oil ratio, the first thing that catches the eye on the above chart is a strong negative correlation between the ratio and the price of light crude. When we go back to 1999, we clearly see that the annual low in crude oil was preceded by the ratio’s 1999 high. We could see this strong relationship also in 2009, when the annual low in crude oil corresponded to the ratio’s 2009 high (marked with a red ellipse). In the following months, the ratio declined heavily, which led to higher oil prices.
Just like in the oil-stocks-to-oil ratio, the stocks-to-oil ratio’s 2011 high was in tune with the bottom of the corrective move that we saw in crude oil. We noticed similar price action also in May 2013. In both cases, declines in the ratio triggered increses in light crude. What’s interesting, the ratio’s lows corresponded to crude oil highs (marked with the green lines). We saw such situations in 2003, 2005, 2008, 2011 and also in 2013.
Looking at the above chart, we see that the RSI has reached its highest level since 1999. Although it is not overbought, we can notice that lower readings on the indicator triggered downswings in the ratio, which resulted in higher prices of light crude.
Taking the above into account, if history repeats itself once again and the ratio declines, we will likely see improvement in crude oil.
Now, let’s zoom in our picture and examine the weekly chart.
Looking at the above chart, we see the same price action – most of the ratio’s tops have corresponded to the crude oil’s lows. In this case, the ratio’s lows didn’t indicate crude oil’s lows precisely. However, major lows in 2008, 2009, 2011 and 2013 were in tune with major light crude’s tops.