Stock Market - Oil correlation

Rather than relying on my eyes I use the correlation indicator to see if I can get a better anwser. This indicator is calculated over two time series. It is 1 when the two series correlate perfectly (each move of one is matched by a move of the other in the same direction) and it is -1 when they anti-correlate perfectly (each move of one is matched by a move of the other one in the opposite direction). It is 0 when they do not correlate at all (the relationship between the two series is random like tossing repeatedly two coins). Obviously, either perfect correlation or anti-correlation imply that the two series are related, either because one is a function of the other, or because they are both functions of a third (unknown) series. The correlation indicator is calculated over a certain period of time. Using a short period will show short-term correlations, if any, using a long period will average the short-term effects out and show long-term correlations.

The chart below shows the correlation indicator between the SPX contract and the crude oil contract over 20 years, calculated using periods of 20, 60 and 240 days, respectively.



What one can draw from the data is that, no matter the time frame one is looking at, the two markets either correlate or anti-correlate for extended periods of time, with generally quick transitions from one regime to the other one. Neither regime appear to be prevalent over the other. Can I attempt to explain or predict one market from the other? Not really, at this point. Even if they are correlating or anti-correlating most of the time, the transitions between regimes seem to occur randomly.

Categories: stock market, correlations