The following is an excerpt from Peter Tchir | February 4, 2016 | Forbes.com |
There has been a link between oil and equities that is either smart, silly or spurious. I am leaning towards “silly” but am concerned that it might be spurious, and when the correlation breaks down, the equity market will realize there are more, and possibly bigger problems, than just oil. I will get there by refuting the “smart” argument, but before we start it is worth highlighting that the recent correlation is unusual and there have been periods where the correlation is negative (which would include oil stabilizing with stocks continuing to decline).
The Smart Argument
The smart argument is at least partially based on the view that oil prices somehow are indicative of the strength or weakness of the global economy. Ignoring for a moment the almost random nature of energy trading, with an obvious element of day trading stop losses, we can assume that the daily price action does tell us something about the supply/demand of oil (I think this is a greater leap of faith on a daily basis than we realize).
If the price of oil is changing due to shifts in supply and demand, it would make sense that it is could be indicating something about the global economy, but...
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