Extended spread between market index and oil price

The January effect didn’t work for year 2016 because of the massive sell off triggered by the collapsed oil price. A strong correlation between the oil price and market index was built since then. It is hard to believe that lower energy price which is benefitted from the development of technology makes the financial market this vulnerable. Some ideas regard the massive selloff in the stock market is on the purpose to maintain huge amount of margin in the commodity market. When firstly the oil price went down at the end of year 2015, stock market positively responded to this change. However, market, which experienced a short rebound, went into a strong down trend corresponding with a falling oil price.

Now, the spread between oil price and market performance just entered into a same situation. While oil price is falling, market still barely maintains the same level. The first step of January tragedy is exactly like this situation. The return spread between USO and SP500 index almost touched 15% at the beginning of January, then market gave up the buying power and went down 10% in one month. Now, we can see the same pattern. The return spread between oil price and market index is extending and even beyond the January level.

Firstly, the spread in June is zero. But suddenly, this spread touched 25% this month. The market movement is so similar to January. Will this pattern continue in the coming month? The Fed has nothing to declare until the last week of August. If market is going to lose faith in the economy and follow the energy price, it is more necessary for investors to eye on a possible market crash.

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