Algorithms Correlating Oil To S&P More Than In Past

“Davidson” submits:

Momentum Investor algorithms connect oil prices to SP500 much more today than in past. The weekly SP500 vs. WTI (West Texas Intermediate Oil Price) from July 2009 reflects some correlation 10yrs ago having evolved into an exaggerated correlation today. The media is awash in chatter about oil prices being a guide to future economic activity, oil being in excess or short supply and the connection to equity prices. Most of what is discussed in the media is in one form or another that ‘market prices forecast economic outcomes’. Very little commentary discusses economic fundamentals as drivers of market prices. The fact remains that prices reflect market psychology after data is reported. Prices do not anticipate, they follow!

Since the teachings of Harry Markowitz’s Modern Portfolio Theory, ‘risk’ is defined as volatility and the goal of every manager is to minimize volatility through the use of mathematical models (algorithms) letting computers run hyper-speed trading programs to react before one’s competitors. The recent market decline showed a much high correlation between the SP500 and WTI pricing than that which occurred with 2014-2016’s almost non-existent correlation. The primary difference, in my opinion, was that 2014-2016 WTI decline had fewer algorithms making the connection in pricing. Unfortunately, there is no means to measure how much capital is subject to algorithms as this data is not available. The best we can do is to infer Momentum Investor thinking in comparison to economic fundamentals. The Oct 2018-Dec 2018 panic occurred with high levels of insiders buying their shares, rising employment, rising retail sales, rising personal income, rising new job openings, rising temporary help levels and strong trends in the Jan 1990-Present monthly Chemical Activity Barometer(CAB)(shown). The other indicators are not shown because it would make this note too cluttered.

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Disclosure: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or ...

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