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The market is one big interconnected machine. Long gone are the days (for better or for worse) of having to track and trade one market at a time and not needing to understand what exactly made that asset or individual stock move in the first place. Today’s market is a bit different, and traders and investors alike need to be aware of the global macro environment to survive and get ahead of the competition.
To do this, there is a simple concept for getting a sounding board in the market’s behavior and outlooks found in correlation regimes and swings. With this in mind, investors should consider two things when embarking on understanding how changing correlations affect the market and why: the mathematical aspect and the narrative aspect.
Growth and Energy Together: What It Means
As correlations begin to align between value stocks and the energy sector, as seen through the iShares S&P 500 Value ETF (NYSE:IVE) and the The Energy Select Sector SPDR® Fund (NYSE:XLE), there are not only mathematical implications but also a narrative that tells investors where the economy and the rest of the S&P 500 might be headed next. This is where the edge is born for retail investors in today’s market.
This doesn’t happen often, but growth stocks have been tracking the oil price lately (or vice versa), and that usually carries a very strong signal. The short version is that if oil prices come down due to less optimistic economic outlooks, money will naturally flow out of speculative growth stocks with more downside risk during this economic downturn.
To track this relationship, investors can simply measure the price data or chart the price of oil together with the iShares S&P 500 Growth ETF and keep this tool in their back pocket when directional biases are needed.
The opposite can be said when correlations aren’t as strong as they are today, but the fact is that the market is screaming a big warning sign for those who know where to look. In fact, many other technical and fundamental factors suggest this bear market is far from over.
Another behavior comparison investors can look into for this relationship is the correlation between oil and value stocks measured by the value exchange-traded fund (ETF). This one has swung deep into the negative, almost forming a mirror image between oil and value stocks.
The economic reasoning is along the same lines, as economic uncertainties and downturns hurt speculative growth stocks and oil, money will likely flow more into value stocks that carry much less downside risk during these down cycles.
How the Market Is Taking This
Over the past month, investors have seen the SPDR® S&P 500® ETF Trust (NYSE:SPY) swing into bearish territory, defined as a 20% or more decline from recent highs, only to then elicit a reaction from institutional capital to come bail it out of that funk.
However, as the market started moving higher in recent weeks, the same volume simply stopped participating, as if having no confidence that the market could continue moving higher. Measuring this decline in volume, along with the correlation shifts in value, growth, and oil, can give investors a clearer picture of how much risk there is.
There is a very strong divergence between the S&P 500 index and the energy sector, and investors need to be fully aware of it today. The Energy Select Sector SPDR Fund has underperformed the broader S&P 500 by as much as 10% over the past month alone, which has a deeper meaning.
Given that oil and energy are underperforming due to economic uncertainties and potential bearish scenarios in the United States economy, there should be no reason for the S&P 500 to outperform energy by this much, especially as there is no interest in growth stocks at the moment, with value taking over.
In fact, investors can see this theme at play with the $517 million in institutional selling that took place in the energy ETF in the most recent quarter (which is only made up of April and May 2025 so far). At the same time, as much as $2.2 billion of capital flew into the value stocks ETF, solidifying this divergence in preferences driven by fundamental economic narratives.
