In life, you never know who is going to get along with whom. You see a group of people and try to determine which ones pair up into couples. Inevitably you end up getting some of them right but some are so far from what you think that it shocks you. This can happen in the markets as well. You hear about the inverse relationship between stocks and treasuries, and take it as a given until they start to move together.
One of those weird relationships has been going on between Crude Oil and the Shanghai Composite over the last three years. Why would these two markets have any correlation? China uses mostly coal for power, not Oil. Yet there is a correlation.
The chart above shows the Shanghai Composite, inverted, as the red line, and West Texas Intermediate Crude Oil as the area behind it. There has been an extremely tight negative correlation between the price of Crude Oil and the Shanghai Composite. They seem to move perfectly opposite. If you had to pick which one is leading, I would put my bet on the Shanghai Composite with the drop in mid 2013 leading the way, and the current leg lower accelerating earlier.
Whether China moving higher is leading Oil lower or the opposite is worth considering. As China is breaking out to the upside again, the move lower in Crude Oil is likely to continue lower, as long as this pair relationship holds.
Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.