10/20/2017 FRIDAY : Hot Topic

# Correlation between Oil and S&P500 futures

### Oil is the news

As of writing this (21 August 2004), oil IS the news:

What we've noticed while trading the ES in the last couple of weeks is that the ES, on small timeframes, moves inversely to the movement in crude oil futures (symbol QM on eSignal). This prompted me to look at the relationship between oil futures and the ES in an attempt to discover if there's any correlation between the two. Unless noted otherwise all charts on this page show the daily closing price of the symbol/instrument mentioned.

This is the first (messy) chart that I "scribbled" by hand in order to show that oil and ES are negatively correlated. It's a little bit misleading because it is roughly drawn and is not accurate. Notice how in the last few days the ES has moved with oil but I haven't shown that. The yellow line is the ES, the blue straight lines are (hand drawn) best fit of movement of the ES, the white lines are oil futures. This is a daily chart based on closing prices.

This chart is more accurate. Yellow is ES and white is QM (oil futures). I have attempted to show in each numbered segment a change in the correlation between the two. For example in segment 2 we see negative correlation as we do in segments 5, 6, and 7. In segments 1 and 3 there's positive correlation and in segment 4 none.
What we are interested in here is what is happening now. Segment 8 shows initial negative correlation which then becomes positive correlation.

In an attempt to mathematically demonstrate a correlation between the 2 futures I applied a couple of correlation studies to them. The left hand chart shows the Pearson's R correlation and the right hand chart shows the Spearman Ranking. The top panel shows a 30 day study and below that is a 60 and then a 15 day study.
To tell you the truth I could not make much sense from the mathematical studies shown here so I've left this for the reader to investigate further and let me know if there is something useful and/or significant which can be used here. Formula details below...

The correlation formulae used in the above charts come from this eSignal group . If you wish to download these studies and use them with eSignal then I suggest that you go to that link and get them. The author of the studies may change or update them and those will be the latest.