No foole like a dubious causality foole II

What happens when oil makes a big move?

NakedShorts continues his fact-based campaign to undermine the conventional “wisdom”—a word scarcely applicable to the explanations proffered by those charged with excuse-making for every market wriggle, but never mind—that daily swings in oil prices have anything to do with what happens on the stock market.

In a desperate attempt to find some — any! — evidence to support the bloviators’ almost daily exhortations that crude oil prices affect the stock market, NakedShorts may have found something. But it’s hardly visible to the naked eye.

In the three years to Jun. 30 2008, the benchmark Nymex West Texas Intermediate crude oil contract moved by three per cent or more on 100 (out of a total 771) trading days, with 59 of those occasions being gains. Does that affect NakedShorts’ contention that, on any given day, crude price movements have little to do with stock prices on any given day?

Well, yes, but hardly.

• The correlation between energy price changes and moves in the broad stock market becomes more strongly negative.
• Despite that, the broad stock market is still more likely to finish ahead (55% of occurrences) when crude rises by more than three per cent, while XLE finished ahead on almost 90 per cent of those days.
• When crude dropped by 3 per cent or more, the stock market finished ahead 63 per cent of the time. XLE was up on only 20 per cent of those days.

Conclusions? When crude is putting in a big up move, the pontificator who uses that to explain a weak stock market is more likely than not just making stuff up. If, however, he credits a big move down in crude prices for a stronger stock market he is somewhat more likely to have a point.

That said, however, yesterday’s market emphasises the point. Crude dropped 4.4 per cent, with the $6.45 poopage nominally the largest drop since 1991 but not in the Top 100 Down Days in percentage terms; still, SPY was down 1.41 per cent, with a goodly chunk of that accounted by XLE’s encounter with a 4.2 per cent cliff.

Data monkey fodder on the other side.

Earlier on Naked Shorts

No foole like a dubious causality foole I
Jul. 15 2008