The trend very much applies to two key investment markets - stocks and oil. They’ve been moving in tandem since the beginning of this bull run.
You can see from the chart below that for the past few months, oil and stocks have been trading together on an upward path. When stocks have gone up (S&P 500, red line), so has oil (blue line) and vice-versa.
Inseparable - oil and stocks move higher in lock-step
Source: Bespoke
This close trading relationship stems from growing optimism for a swift economic recovery and sentiment that ‘the worst is over’. The mentality is that such an upturn will boost corporate earnings and buoy demand for energy, pushing up stock and oil prices respectively.
But, don’t be complacent. Trades that are correlated on the way up can be correlated on the way down too. If the optimism proves to be misplaced, we could end up back where we started. In the past 12 months, we’ve seen stocks fall 38% and the oil market slump by 59%.
Recent history has taught us that managing risk is about more than merely diversifying across different asset classes such as oil and stocks. It requires the effective use of stop-losses to bank profits while they still exist. If we don’t, the rallies we are currently experiencing in both these markets could be for nothing.
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