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April 29, 2016

Oil, China Correlations Still High

by Jeff Tjornehoj.

With oil prices up 59% from their mid-February lows and both the S&P 500 and Hang Seng indices up somewhere around 15%-17% since then, we wondered if—and how tightly—both indices are performing together. Running 50-day correlations would also test whether the same close relationship still exists for the S&P 500 relative to commonly quoted commodities such as oil and copper.

In relation to China’s main index the S&P 500 has continued to walk side by side, with the 50-day correlation still near 0.95. Curiously, for many years copper prices were considered a reliable indicator of China’s economic strength (and stock prices), but that relationship is less certain anymore; the recent 50-day correlation between those two (not shown in the graph) has hovered around 0.60—still positive but not nearly as strong as it once was. Except for a few days this year, U.S. stocks haven’t shown much of a correlation with copper prices over the past year.

And what of oil? Despite the strong rebound in oil prices, the S&P 500 has had a recent correlation of 0.88, which suggests traders are still keeping a watchful eye on oil prices ahead of stock trades.

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