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In this environment of extreme correlations within and between various asset classes, there are some relationships that are strange to say the least. A case in point is the price of oil and the performance of Consumer Discretionary stocks. Typically, one would expect that rising oil prices are bad for the consumer and ultimately Consumer Discretionary stocks, while a drop in crude oil prices would be good for the consumer. Historically this has generally been the case.

The chart below shows the rolling six-month correlation between the price of oil and the S&P 500 Consumer Discretionary Sector from 1990 - September 2008. While the correlation alternated between positive and negative levels, more often than not the two were inversely correlated. Over this time period, the average correlation coefficient between the two was negative 66% of the time for an average of -0.227.

click to enlarge

That all changed in late 2008. Below we have extended the correlation chart above to include the last three years (red line). As shown, the relationship between oil and the Consumer Discretionary Sector has seen a major shift.

Over the last three years, the rolling six-month correlation coefficient between the price of oil and Consumer Discretionary stocks has been positive 100% of the time for an average of 0.69! Prior to the current stretch of three straight years of positive correlation, the longest oil and Consumer Discretionary stocks went without being negatively correlated over a rolling six-month period was a mere eight months back in 1996.

Source: Strange Bedfellows: Oil And Consumer Discretionary Stocks