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New study provides fresh evidence that stocks will soar this year

Talking Numbers

New study provides fresh evidence that stocks will soar this year

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New study provides fresh evidence that stocks will soar this year

New study provides fresh evidence that stocks will soar this year
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The technicals are now saying buy this stock: Pro

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The technicals are now saying buy this stock: Pro

There’s a signal that stocks could be headed a lot higher—and it’s found in the price of oil.

A recent study by Oppenheimer & Co.’s head of technical analysis, Ari Wald, looks at more than 30 years of data and finds an extraordinary relationship between the performance of oil and the S&P 500.

Wald looked at the rate of change in West Texas Intermediate crude oil prices over the course of 52 weeks. He found that as long as oil isn’t more than 50 percent higher than it was the previous year at any given weekly close, then stocks will move higher up to a full year out on average.

What’s more, when oil prices are lower compared with the previous year, stock prices subsequently gain an average of 13 percent one year out.

Spikes in WTI crude futures vs. S&P 500 forward performance

Data since 1983

WTI crude oil 52-week rate of change

4 weeks

13 weeks

26 weeks

52 weeks

Frequency

>50%

0.2%

-0.4%

-2.9%

-4.0%

11%

0% - 50%

0.6%

2.3%

5.3%

10.2%

46%

<0%

1.1%

3.2%

6.4%

13.2%

43%

Source: Ari Wald, Oppenheimer & Co.

That could be some very good news for stock investors, since the price of oil is down 14 percent in the last 52 weeks.

This somewhat flies in the face of the idea that oil and stocks must move together, given that oil is thought of as an indicator of economic activity. Wald wanted to see if lower oil prices meant lower stock prices were ahead.

(Read: Oil loses steam as US stockpile tumble gives way to demand fears)

“We crunched the numbers and found out this was not the case,” said Wald. “In fact, it tends to actually be good for stocks.”

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When oil prices were lower compared with the previous year, the forward performance for the S&P 500 was higher than average, Wald discovered.

“This is good; this is a tailwind for stocks,” Wald said. “On the flipside of it, when you get spikes—when the rates of change is above 50 percentthat’s the time to get worried. If you look back at market tops in 1987, 2000 and 2007, all occurred with spikes in oil.”

Wald remains bullish on equities, with this study confirming his viewpoint. “Overall, there is a full range of reasons we like stocks,” he added. “This is just one of them.”

(Watch: Two experts warn correction could total 60%)

For Chad Morganlander, portfolio manager at Stifel Nicolaus’ Washington Crossing Advisors, the causes of lower oil prices are more important than the size of the move.

“If oil goes down for the reason that the global economy is decelerating and falling considerably, then that’s a bad thing for stocks,” Morganlander said. But if oil heads down because of subsiding geopolitical concerns or added oil finds coupled with an improving economy, “the market will go higher.”

Morganlander expects that oil will fall 5 to 10 percent over the next 12 months while stocks rise. “If oil were to continue to go lower, it would actually be great for consumption patterns here in the United States,” he said. “It would be very bullish. And that’s one thing that I think that over the course of the next 12, 18 and 24 months, one shouldn’t be surprised to see.”

To see the full discussion on oil and stocks, with Wald on the technicals and Morganlander on the fundamentals, watch the above video.

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