Oil & Stocks: When One Rises, The Other One Falls?

Crude oil is trading above $70 again. And if you've watched the markets for a while, you know that when oil starts to make big moves, hardly a day goes by without someone saying something like “crude up -- stocks down,” or vice versa. Except, sometimes commentators seem to forget which way stocks are "supposed to" move in relation to oil. Which can lead to headlines like these two, which ran recently, days apart, on the same news web site:

* Stocks Get Octane Boost From Oil -- Financials and oil futures and stocks helped the major indices add to the week's gains Thursday... (TheStreet.com, June 4)
* Stocks Slip as Oil Moves Up -- Stocks in New York slunk back after a positive open Wednesday, while crude oil continued higher... (TheStreet.com, June 10)

Despite an occasional disconnect like that, analysts keep driving home the notion that when oil rises, stocks fall. But even a cursory look at recent history proves this assumption wrong. Oil's last significant bottom came in 2002, near $20 a barrel. From that low, it zoomed upward to the all-time high of $147 in July 2008. The DJIA also made a low in late 2002 and zoomed upward too, right alongside the rising oil prices, to its all-time high in October 2007.

It's even more obvious when you plot this presumed relationship on a chart. Here's one our European Financial Forecast presented to subscribers in 2004, showing the lack of correlation between the German DAX stock index and the price of oil: