As I mentioned quite recently, much has changed in the markets. The past 40 trading sessions have seen quite a change of fortunes. While the S&P 500 Index is up over 5% during that period, oil is down over 13% and gold is down over 8%. Is this bullish, indicating a lessening of inflationary forces, or is it bearish, suggesting an economic slowdown? I decided to take a historical look.
Going back to 1990 (N = 4170 trading days), we find 162 daily occasions in which oil has been down 10% or more over a forty-day period and gold has been down 5% or more. Forty days later, the S&P 500 Index has been up by a very healthy average of 3.87% (120 up, 42 down). That is much stronger than the average 40-day rise of 1.45% (2669 up, 1501 down) for the sample overall.
Of course, many of these days represent overlapping periods in SPX. Let's break it down:
* We had falling oil and gold in March and April, 2003. That was a great time to buy stocks.
* Falling oil and gold in November and December, 2001 was not a good time to own stocks.
* We had one day that qualified in July, 2001, and it was a very bad time to own stocks.
* A series of days in April, 2000 with falling gold and oil offered mixed opportunity.
* June, 1998 also offered most lower stock prices after falling oil and gold.
* December, 1997 and January, 1998 were excellent times to own the S&P.
* July, 1997 was most positive as a time to own stocks.
* February, 1997 was a losing time to own stocks during falling oil and falling gold.
* February and March, 1991 were excellent times to hold stocks when oil and gold fell.
* November and December, 1990 were also good times to hold the S&P.
* March through May, 1990 featured falling oil and gold and were mostly excellent times for stocks.
The pattern I notice here is that the occasions in which stocks performed best during periods of falling oil and gold were ones in which the significant declines in oil and gold were sustained over multiple months. Very short significant periods of falling oil and gold were not so favorable to stocks as lengthy periods that extended for more than a month. The longer oil and gold stay weak, it would seem, the better it is for stocks forty days hence. I will track this in the daily market summaries on the Weblog.