The Wall Street Journal did a nice little piece on the rising correlation between oil and stocks yesterday, found here –
From Houston to New York, energy traders and commodity investors are watching a new and unusual phenomenon: a persistently high correlation between oil and stocks….
To test how tradeable this growing relationship has been, I ran the ETFs for the S&P 500 (SPY) vs. Crude Oil (USO) through the Pairs Model Analysis model built into ETF Rewind, as presented below:
Although the idealized model shows nice linearity together with a remarkable win to loss ratio, I noted the trending nature of the relationship leads to very long look-back periods (at least using this algorithm). Extended periodicity is not a quality that I particularly like to see when trading pairs, for which I prefer faster reversions more in the swing camp.
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