We've been bearish on both oil (NYSEARCA:USO)(NYSEARCA:UWTI)(NYSEARCA:OIL) and the stock market (NYSEARCA:SPY). We think there is an understandable relationship between the two. Both react to overall demand. We've heard many global bodies come out recently to say that global demand is slowing. We expect that this can also ultimately drag the stock market lower.
Here's a chart showing the leading nature of oil to the stock market.
You can see that oil peaks correspond in advance to stock market peaks.
In most cases an oil peak led a stock market peak. The longest peak to peak period that we saw was two months and nine days. You can see where the chart is marked 2 months.
All other lines that we drew are at a slight angle. None of those lines are a straight vertical line. In each case a major oil peak led to a major stock market peak.
The last peak for oil was June 9th. (see chart above at the bottom right for the mark June 9th)
We are now at July 25th. If this period matches the longest period we'd expect a peak mid August. That said, oil predicted a stock market peak usually much sooner.
Global Slowdown Risk
We've been writing that Japan, the US, ECB, and now the G20 are all worried about growth slowing.
Brexit was a speed bump in the growth trajectory which has helped spark these concerns. One issue with Brexit is that government stimulus requires momentum. The hope for stimulus is that one day the economy will pick up to a self-sustaining run rate that stimulus can then be pulled. Brexit was a speed bump to that momentum thus causing increased concerns for slowing growth.
Oil as a commodity reacts to supply and demand shifts. Demand is shifting lower which brings oil prices lower. That same demand also affects stocks. That's why we think the relationship between oil and the stock market is meaningful.
If global growth slows any further we will be in a worldwide recession. Here's global GDP's chart.
You can see above that global growth is barely positive. If the recent concerns are correct we could enter a global recession. We think the pure nature of oil reacting to global demand is an early warning sign for the stock market.
We think that oil peaks have predicted stock market peaks. We just passed a decent oil peak. We think that a stock market peak can soon follow.
We are bearish on both the stock market and oil.
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Disclosure: I am/we are short S&P 500.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.