lf you've been following the markets on a daily basis over the last few months, chances are you've noticed that oil and stocks have been trading hand in hand together. When stocks have gone up on the day, oil has also gone up, and vice versa. Below is a chart highlighting the price of oil and the S&P 500 so far in 2009. As shown, both are up big since the March lows.
To quantify this trading relationship, we calculated the correlation between the daily percent change of oil and the S&P 500 on a 50-day rolling basis going back to 1986 (as far back as daily oil pricing goes). As shown below, prior to recently, the correlation between the two over any 50-trading day period had never gone above 0.50 (1 is perfectly correlated). Now, however, the correlation between their daily moves is at its highest level ever and approaching 0.60. So if you've noticed that the two seem to be much more inline with each other recently, here's your proof.
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