S&P 500 and Oil

Remember when the stock market moved in the exact opposite direction of oil a couple of months ago?  As oil went up, stocks went down, as the impact of higher energy costs was supposed to weigh on the economy.  That trade has now completely reversed.

The chart below highlights the change in the S&P 500 and oil this past week.  As shown, the two have moved in perfect tandem, and in fact, the correlation between the two on a minute-by-minute basis this week has been 0.97.  That's about as high as it gets for asset classes.  When markets are stable, asset classes are much less correlated.  When panic sets in, correlation spikes sharply, and it turns into a diversification nightmare.

click to enlarge

Comments

[pprimo:]

diversification nightmare? ummmm, you mean perhaps divergence?

2008 Oct 14 08:48 PM