Talking Numbers - CNBC | Yahoo Finance

Sponsored by
Talking Numbers

This indicator says sell now: Strategist

Talking Numbers

This indicator may be telling us the economy is in more trouble than stock prices suggest.

Crude oil settled at a five-month low on Tuesday at a time when the S&P 500 index is near its all-time highs. Is oil telling the markets that it should start worrying about the economy?

Conventional wisdom holds that the price of oil and the stock market should trade in opposite directions. After all, energy is an input in just about everything the economy produces. But, a look, at the data shows that the two have been trading in tandem.

From the market's bottom in March 2009 until the end of last year, the S&P 500 was up 111% while crude oil was up 99%. Even for the first half of the year, the S&P was up 13% while crude oil gained nearly 7%. But over the last two months, the S&P 500 is up 6.5% while crude oil is down 13.5%. Having closed at $93.72 per barrel on Tuesday, oil is now trading where it was back in June.

(Read: Crude reels; WTI skids to 5-month low amid supply fears)

John Stephenson, portfolio manager at First Asset Investment Management, says lower oil prices will help stock. "Many people said that high crude prices are really bad for the economy," says Stephenson. "But, the fact of the matter is high crude prices come from a strong economy."

Stephenson also asserts that declining oil prices has an effect on sentiment. "As an impact on the actual consumer, it's only three and a half percent of the family budget," says Stephenson. "So, it's not a big impact but it'll make people feel a little better."

"Overall, I see this divergence as being very healthy and continuing to add to the strength the [Federal Reserve Bank] is giving us to sustain this rally," says Stephenson, referring to the Fed's $85 billion per month monetary stimulus. "I see this as very, very positive."

(Read: US stocks finish mostly lower; S&P 500 not far from record high)

Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, believes that the divergence between stocks and crude prices is a sign things may not be as good as they seem.

"Crude oil [has been] viewed more as a proxy for global economic recovery than as a headwind for the economy," says Ross viewing the charts comparing prices in the S&P 500 to oil over the past half-decade. "Now we see this curious divergence. On a year-to-date basis, the S&P is up 23% and rising as we speak. Crude oil is up only 2%. Is this really a proxy for the economy [or] is it telling us that perhaps the economy is not as robust as the action in stocks might otherwise suggest?"

Ross sees the price of oil continuing to fall and for him, that's not a good sign for stocks. "I think this is a bearish divergence for equities," notes Ross.

To see more of Stephenson's fundamental analysis and Ross' technical analysis on what falling crude oil prices mean for stocks, watch the video above.

More from Talking Numbers:

Why BlackBerry is the next Palm
This could be a huge contrarian sell sign
Schiff: US fundamentals are awful, buy gold

________________

Follow us on Twitter: @CNBCNumbers
Like us on Facebook: facebook.com/CNBCNumbers

Rates

View Comments (10)

Recommended for You

  • China's rich pimp their planes as jet market takes off

    Shanghai (AFP) - When a Chinese customer asked for the interior of his new Bombardier Challenger 850 jet to be covered with pricey black carbon fibre, the designer was shocked -- but happy to oblige.

    AFP
  • Obama admin. says health subsidies will continue

    WASHINGTON (AP) — A federal appeals court delivered a potentially serious setback to President Barack Obama's health care law Tuesday, imperiling billions of dollars in subsidies for many low- and middle-income people who bought policies.

    Associated Press
  • What a Marijuana ETF Would Look Like

    The changes taking place around marijuana for medical use and for recreational use are the biggest in almost everyone’s lifetime. There are quite literally billions of dollars up for grabs for those who ...

    24/7 Wall St.
  • CEO: Rivers to quit Clippers if Sterling stays

    LOS ANGELES (AP) — The interim CEO of the Los Angeles Clippers testified Tuesday that coach Doc Rivers told him he will quit if Donald Sterling remains the owner of the team.

    Associated Press
  • We Paid Off $90K of Debt in 4 Years

    One couple went into debt to give their son the education that he needed, eventually owing nearly $90K on credit cards. Here's how they paid it off.

    Credit.com
  • U.S. housing turning the corner, inflation creeping up

    By Lucia Mutikani WASHINGTON (Reuters) - U.S. home resales hit an eight month-high in June, suggesting the housing market was gradually regaining momentum and would help the economy to stay on a higher growth path this year. The third straight month of home sales gains, reported by the National…

    Reuters
  • Airlines ban flights to Israel after rocket strike

    JERUSALEM (AP) — A Hamas rocket exploded Tuesday near Israel's main airport, prompting a ban on flights from the U.S. and many from Europe and Canada as aviation authorities responded to the shock of seeing a civilian jetliner shot down over Ukraine.

    Associated Press
  • Goldman Sachs: Here Are 25 Small-Cap Stocks to Buy

    While Goldman Sachs is cautious on small-cap stocks due to valuation concerns, the firm still finds some pockets of opportunity among individual names within the group.

    The Wall Street Journal
  • Detroit retirees back pension cuts by a landslide

    DETROIT (AP) — A year after filing for bankruptcy, Detroit is building momentum to get out, especially after workers and retirees voted in favor of major pension changes just a few weeks before a judge holds a crucial trial that could end the largest public filing in U.S. history.

    Associated Press
  • Play

    How to Build Your Own Annuity

    Instead of paying an insurance company, financial advisor Allan Roth recommends building your own "indexed annuity" that protects principal while giving market upside.

    WSJ Live
  • Herbalife Plummets

    Herbalife shares were down as much as 11%...

    Business Insider
  • China food scandal spreads, drags in Starbucks, Burger King and McNuggets in Japan

    By Adam Jourdan SHANGHAI (Reuters) - The latest food scandal in China is spreading fast, dragging in U.S. coffee chain Starbucks, Burger King Worldwide Inc and others, as well as McDonald's products as far away as Japan. McDonald's Corp and KFC's parent Yum Brands Inc apologized to Chinese…

    Reuters
  • New India government urges changes to World Bank

    India's new government has called for reforms to the World Bank structure to reflect the "emerging" clout of developing nations in a meeting with visiting bank chief Jim Yong Kim. The government, which took office in May, said in a statement late Tuesday that Finance Minister Arun Jaitley stressed…

    AFP
  • Beef pollutes more than pork, poultry, study says

    WASHINGTON (AP) — Raising beef for the American dinner table does far more damage to the environment than producing pork, poultry, eggs or dairy, a new study says.

    Associated Press
  • How to avoid the biggest 401(k) mistakes

    Avoiding these four common, but serious, 401(k) mistakes can mean the difference between a great retirement and a shaky one.

    MarketWatch
  • Play

    U.S. Stocks Open Lower

    U.S. stocks kicked off the week in a decline, as investors paused following last week's run to record highs. MarketWatch's Victor Reklaitis joins Paul Vigna on the News Hub with the details, plus which stocks to keep an eye on. Photo: Getty

    WSJ Live
  • JetBlue pilot among 6 arrested in Boston drug bust

    BOSTON (AP) — A JetBlue pilot from Florida is among six people arrested by Boston police over the weekend in an investigation of drug dealing incidents near the Boston Common.

    Associated Press
  • Microsoft profit hurt by Nokia, but revenues jump

    Microsoft said Tuesday profits took a hit from its newly acquired Nokia phone division but that revenues got a strong lift from cloud services. The US tech giant's new chief executive Satya Nadella said the results suggested that Microsoft's shift to services amid declining personal computer sales…

    AFP
  • Rebels release train with bodies from downed jet

    HRABOVE, Ukraine (AP) — Bowing to international pressure, pro-Moscow separatists released a train packed with bodies and handed over the black boxes from the downed Malaysia Airlines plane, four days after it plunged into rebel-held eastern Ukraine.

    Associated Press
  • Play

    Health Care a Leader in Moat Stocks

    The health-care sector has a higher volume of moat firms compared with other industries, and companies' patent and brand power deliver very strong returns on capital.

    Morningstar