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Why lower oil won’t help stocks

Talking Numbers

What’s next for the markets given declining oil prices?

Oil prices are down about 3% in the past month. But, what does that mean for stocks?

Nearly one month ago, it seemed more than possible the United States would take military action against Iran’s Syrian allies. That helped drive the price of West Texas Intermediate Crude Oil contracts above $117 per barrel for the first time in over two years.

(Read: Brent rises in heavy spread trading, eyes on Iran)

Since then, oil prices fell as the US government found it difficult to build support for intervention. As the probability of American action decreased, it took oil prices down with it.

Yesterday, addressing world leaders at the United Nations General Assembly, US President Barack Obama opened the door to negotiations with Iran on Tehran’s nuclear ambitions. This diplomatic overture to a major oil exporter helped bring down oil a little more. Oil ended trading in the $103 range, down 5% since the end of last week.

(Read more: US oil settles near $103; market eyes Iran's olive branch)

But do lower oil prices translate into higher stock prices? After all, lower oil prices should mean lower input prices, more consumer spending, and thus higher profit margins for companies, right?

Well, the data disagree. Over the past two years, the correlation between the S&P 500 index and the crude oil contracts has been about 0.6. That means they generally move together. One reason may be that a heated (or, at least, a warming) economy means more business activity and therefore more demand for oil.

So, what’s next for the markets given declining oil prices?

We pose that question to CNBC contributor Andy Busch, author and publisher of the Busch Update. Busch takes a look at the fundamentals. On the S&P 500’s charts is Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grasyon.

Are lower oil prices a positive development or a harbinger of things to come for stocks? Watch the video above to see Busch and Ross analyze what’s next for the markets.

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