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The S&P 500 index has shown a close correlation with the falling oil price, so a rising price should reduce the gravitational pull we've seen since the start of this year.

Oil prices going higher - yahoo!

Peter Switzer
29 January 2016

US stocks were positive with about two hours left to trade and there were two stand out positives from my point of view. First, oil prices continue to sneak higher to over $US34 a barrel. Second, a huge company called Caterpillar reported earnings at 74 cents a share, against market estimates of around 69 cents.

With the latter, revenue was down but that was expected as this company works with mining companies worldwide and infrastructure projects. So China’s switch from being big on huge construction spending to be more focused on the services sector has hit Caterpillar.

Right now, the Yanks are doing their company show-and-tell expo for the fourth quarter of 2015 and we’re starting ours in earnest over the next couple of weeks. Earnings could be critical to taking the stock market up and I’ve been hoping that the plus of lower oil prices will help all those companies around the world, which have energy and transport costs that have to be lower.

This has to be a positive sleeper that one day should help profits and then stock prices because they are related.

So, why am I yelling “Yahoo!” at rising oil prices? Well, the S&P 500 index has shown a terribly close correlation with the falling oil price, so a rising price should reduce the gravitational pull we’ve seen since the start of this year in particular.

I don’t want oil prices to spike too high so that it becomes a significant negative to all those companies and consumers out there who are benefiting from lower petrol prices, but I do want to see some elevated stability for the price.

The negativity from the stock market slide since April last year isn’t helping confidence and this is crucial for global economies, including ours. We need to see that all this quantitative easing, where the world’s money supply was allowed to expand rapidly, bringing interest rates down with it, ends up in faster growing economies. And rising confidence is the key.

Bad news stories, such as oil prices falling and predictions that it’s heading to $US10 a barrel, spook business leaders and investors because there’s an assumption by many that it reflects a huge drop in demand from China specifically and the world generally.

These stories ignore the massive increase in supply from OPEC and non-OPEC countries. In fact, the best headline I’ve seen this week came from Reuters, which told us that OPEC and Russia are talking about cutting supply, though this story has been denied this morning by Saudi sources. However, they would deny such talks, wouldn’t they?

If oil does start resisting gravity, company earnings start to pick up and we see some positive decisions from the likes of the European Central Bank, as well as the Fed, this current stocks negativity could easily turnaround.

Currently, stock markets are trying to go higher but there isn’t anything convincing to justify unbridled, cockeyed optimism. Let’s hope it’s only a matter of time and I’ll throw in my second favorite headline from this week from CNBC, which went: “Panicky sellers will be sorry: Schwab strategist.”

Anyone needing reminding that there’s a good chance of a market comeback should see my interview with AMP Capital’s Shane Oliver last night.

Go the bulls and let oil prices flow higher but not too much higher!

Just for the record, the S&P 500 index ended up 10.41 points or 0.55%. That’s worthy of another “Yahoo!”

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