Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How NOT to Be Among the MANY Stock Investors Fooled by This Market Myth

Stock-Markets / Oil Companies Nov 15, 2018 - 04:05 PM GMT



October included a market phenomenon that left many economists and commentators scratching their heads.

US stocks and oil prices both dropped simultaneously. In fact, it was the worst month for oil in 2 years and the worst month for S&P 500 in over 7 years.

What was the "phenomenon"? Well, conventional wisdom says that rising oil prices are bearish for stocks. So, how could falling oil prices also be bearish for stocks?

In Chapter 2 of his seminal book, The Socionomic Theory of Finance, Robert Prechter covers 13 erroneous market correlations that most investor believe, but in fact are bogus. Armed with dozens of historical studies, Prechter scrutinizes the evidence regarding each claim. Here's what he writes about the supposed correlation between oil and stock prices.

(Note: If you haven't read The Socionomic Theory of Finance, you should. You'd be shocked how much of what you are fed is bogus. Learn more about the book, including how you can get it for free here.)


Excerpted from The Socionomic Theory of Finance by Robert Prechter

Claim #2: "rising oil prices are bearish for stocks."

It would take months to collect all the statements that economists have made to the press over the past forty years to the effect that rising oil prices are "a concern" or that an unexpected (they're always unexpected) "oil price shock" would force them to adjust or rescind their bullish outlook for stocks and the economy. Academic papers supporting this claim are legion.

For many economists, the underlying assumption about causality in this case stems from the experience of 1973-1974 after the Arab Oil Embargo, when stock prices went down as oil prices went up. That juxtaposition appeared to fit a sensible story of causation regarding oil prices and stock prices, to wit: Rising oil prices increase the cost of energy and therefore reduce corporate profits and consumers' spending power, thus putting drags on stock prices and the economy.

These headlines are compatible with this claim:

Earnings, Lower Oil Prices Rally Stocks—USA Today, April 8, 2006
Surging Oil Prices Pull Stocks Lower—ABC News, July 14, 2006

Is the claim valid?

In response to these very headlines, the July 25, 2006 issue of The Elliott Wave Theorist offered Figure 6, showing the preceding three-year market environment. Examine it and see if you can discern any indication whatsoever that lower oil prices make stocks rise or vice versa. As I said at the time, "Oil and stocks have trended mostly in the same direction for more than three years, so these headlines are backwards." Switching to forecasting mode, that issue added, "A falling oil price probably won't be bullish for stocks, either. When deflation takes hold, they will probably both go down together." That's exactly what happened two years later, as you can see on the left-hand side of Figure 7.

One of the most revealing headlines of this period occurred a month into oil's crash:

It's hard to lose betting on stocks as oil falls

—USA Today,
August 12, 2008

The accompanying article offered a 20-year study that predicted how much each stock sector would rise during a bear market in oil. An economist and chief portfolio manager explained, "If oil prices are falling, a key cost for both consumers and businesses is also falling. It acts as a benefit for the stock market overall." A fellow money manager agreed, saying, "Nothing bad happens if oil prices keep falling. But if oil prices turn up, uh oh."1 The causal case could hardly have been clearer. As it turns out, the very next trading day capped a three-week stock market rally, after which the Dow began to accelerate downward in its biggest bear market in three generations, all while plunging oil prices were providing their supposed benefit to consumers, businesses and the stock market.

On February 21, 2011, the price of oil rose for a day (ostensibly on unrest in the Middle East), and U.S. stocks fell. The media once again quoted many economists warning that an "oil-price shock" would be bearish for stocks and the economy. At least three world-class news publications 2 ran lead editorials detailing the financial and economic damage said oil price shock might cause. Those assertions prompted our publication of Figure 7. Observe that as oil prices crashed 78% in five months, stock prices were cut in half; and then, as oil tripled, stocks doubled. These are not minor moves that one could dismiss as being anomalous. They include the biggest, fastest decline in oil prices ever along with the deepest stock market decline in 76 years, and the fastest oil-price-tripling on record along with the fastest two-year stock market rise in 72 years. Consider also that during most of the decline in both markets a recession was in progress, and during most of the rise in both markets an economic recovery was in progress. These are palpable refutations of economists' causal hypothesis.

No one looking at these histories could wrest from them the idea that rising oil prices "shock" the stock market into a decline and the economy into a contraction and vice versa. Only those not looking at data who are married to their causal explanation and who routinely ignore evidence could tell reporters in February 2011 that a one-day rise in the oil price was bearish for stocks and that further rises in its price would wreak havoc on the stock market and the economy. Yet dozens of experts did just that, in dozens of articles.

As with our interest-rates example, an economist could account for the evidence in Figure 7 and stay true to his exogenous-cause model by reversing the direction of his exogenous-cause argument—as we did earlier with respect to the stock market and interest rates—to postulate that an expanding economy makes stock prices and oil prices rise and fall together. He could offer the following logic: As the economy expands, business picks up, so stock prices rise; and as businesses operate at higher capacity, demand for energy rises, pushing up the price of oil. That's why prices for stocks and oil go up together. That makes sense, too, doesn't it?

An economist who made that case, however, would have to tell the media that the one-day rise in the oil price was bullish and that a falling oil price would jeopardize the stock market and the economy. Would economists ever say such a thing?


In the rest of this chapter, Prechter investigates the correlations between stock prices and interest rates, corporate earnings, employment … and much, much more. It's an essential read for serious investors. Learn more here.

This article was syndicated by Elliott Wave International and was originally published under the headline . EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in