In my earlier posts, I presented my rational behind being inclined to the side on U.S. equities. Now, I am presenting the mechanics of my first shorting attempt.
There has always been a good positive correlation between short term WTI Crude Oil and the S&P500 OVER THE SHORT TERM. Having that said, the recent downside break in oil prices warns the it is probably the time for a correction.
The strong divergence on the 14-week also warns of extreme exhaustion, meanwhile, the index is hanging at the ceiling of this multi-year .
I am risking around 2.5 percent, and targeting around 7 percent pullback for now.
Following chart is from the OIL (white), compared to DOLLAR (green) and SP500(orange) and correlation indicator is between US Dollar Vs DUBS ( commodity index)
So general macro economic rules are as follows and can be validated in the chart on red box 1 and 2 (not exclusively):
1- Golden rule, the dollar is negatively correlated to commodities (although box 3 and 4 shows very short term neutral to positive correlation on 34 period, nothing alarming)
2- I think the way you have to take the problem, as Darabased and you said is on the demand analysis of OIL, think of it like the copper thus making this indicator as a lagging indicator. So the following assumptions would be: a- Better economy, more demand for oil, higher prices for stocks and oil and dollar goes down. This is box number 2. b- But the other case would be higher prices in oil (because of less supply or whatever) pressuring stock prices because of expensive oil prices provoking an eventual slowing of economy, as you can see in box #2.
So in your case this should be a leading lagging indicator, that is to say a sign that demand for oil is decreasing (or supply coincidently increasing at those reversing point --red arrows on charts), but yet market not reflecting this change on stock prices. So this is definitely the definition of a bubble and your post is theoretically right! :)
But everything is saying the same thing : market is over extended because FED prints money and we don't care about macro economics, or divergence, or warning signs of a impeding correction lol....But short term i am short SPY for sure, test of supports are needed at this point.
I am not saying my trade is a perfect trade, there is a high probability of risk here as its a contrarian one, but it's just a trade that has a good reward compared to risk in terms of value.