The "Great Oil Divergence of 2016" Could Be Near
Oil jumped 5% yesterday. Stocks also rallied.
The tail’s wagging the dog again. No matter how hard the market’s tried to escape, stocks have been anchored to oil. A down day for oil has meant a down day for the major averages. And vice versa.
The magnitudes of their fluctuations haven’t matched up. But directionally, stocks and oil have been joined at the hip this year.
But this relationship might be coming to an abrupt end. Today we’ll explore what might happen when oil and stocks say their long goodbyes—and how it could affect your trades.
Despite yesterday’s action, stocks are actually attempting a daring escape from crude’s clutches.
“For 2016, the two had been moving in lockstep with each other, but over the last several days they have parted ways,” Bespoke Investment Group reports. “Now, over the last three days as equities have come under pressure, crude oil prices have rallied.”
Until yesterday, the S&P 500 and oil had traveled in opposite directions for over a week. Bespoke notes the last time they diverged that frequently over an eight-day period was last July.
If we take a look at a chart, you can see how startling the separation has become this month:
There are no guarantees oil and stocks go their separate ways anytime soon. We’ve been watching this situation for the better part of 2016. So far, any divergence has been short lived. Within a few days, these two lovebirds are locked at the hip once again…
“If stocks make a clean break from oil’s downward pull, it could set the stage for more stability,” we said back in February. “Oil and stocks rallied in tandem instead. Now their rallies are running on fumes simultaneously. Stocks are left at the mercy of the energy meltdown once again.”
The last thing we need is for oil to plunge lower and drag stocks down the tube. But their recent breakup—if it lasts— could be a sign of things to come. Frankly, I’m sick and tired of everyone’s obsession with this oil and stocks story. If the major averages are going to attempt a legitimate run at their highs, they’ll need to break the oil shackles.
Breaking up is hard. But the great divergence could be underway…