Something appears wrong with the chart comparing energy stocks with crude-oil prices, as what used to be a near-100% correlation has flipped to negative since oil prices peaked earlier this year.
Brian Reynolds, chief market strategist at Reynolds Strategy LLC, said that negative correlation is a warning for investors in oil stocks, who appear to be buying on the belief inflation keeps rising without regard for the performance of the underlying commodity.
“Thus, we believe oil stocks are especially vulnerable to a further decline in oil prices,” Reynolds wrote in a note to clients.
The correlation coefficient between continuous crude-oil futures
CL00,
and the SPDR Energy Select Sector exchange-traded fund
XLE,
from when crude futures closed at a 23-year low of $11.57 on April 21, 2020, to when the energy ETF (XLE) closed at a then-eight-year high of $92.28 on June 8, 2022, was 0.96, according to a MarketWatch analysis of FactSet data.
A correlation of 1.00 would mean the two were moving exactly in tandem.
But since the XLE’s June peak, the correlation has been negative 0.27, meaning more often than not, crude futures and the XLE have moved in different directions. On Monday, the XLE was down 2.1% in afternoon trading while crude futures rallied 1.5%.
FactSet, MarketWatch
The XLE, which reached a fresh eight-year high of $94.08 on Nov. 15, has gained 16% since crude futures peaked on March 8, while crude futures have tumbled 37.4% and the S&P 500 index
SPX,
has lost 4.9%.
When oil prices plummeted sharply in 2014 amid a supply glut, the correlation between crude futures and the XLE in the eight months after crude peaked on in June 2014 was 0.94.
Among some XLE components, the correlation crude futures and Chevron Corp.’s stock
CVX,
from the April 2020 crude trough to the June 2022 peak in Chevron, was 0.91, while the correlation since then has been negative 0.29. For Exxon Mobil Corp.’s stock
XOM,
the correlation with crude flipped to 0.94 to negative 0.37.
Some downside chart levels to watch include the $85 area, where prior resistance at the August highs and 50-day moving average (DMA), a closely watched short-term trend tracker, currently converge.
FactSet, MarketWatch
Below that, the 200-DMA, which many see has a dividing line between longer-term uptrends and downtrends, currently extends to about $79. (Keep in mind that not only are crude-oil futures below both the 50-DMA and the 200-DMA, the 50-DMA crossed below the 200-DMA — a bearish “death cross” — in early September.)
Also, an uptrend line starting in October 2020, and roughly connecting lows in August, and October 2021 and July and September 2022, currently extends to about $72.25, while the potential support defined by the July and September 2022 lows is in the $65-to-$68 range.