Rocky White
2 min read
Oil prices surged late last week, as tensions between Israel and Iran escalated into conflict. The price reverted some on Monday, but is now back above last week’s close. I’ve gathered data on how oil and stocks typically behave after a weekly spike in crude prices. Let’s see if these scenarios have historically produce high-probability trading opportunities.
Oil rose 12% last week after the attacks in the Middle East. Since 1985, there have been 52 other instances of a weekly double-digit gain for oil. The table below summarizes the returns after those weekly spikes. The second table is for comparison, showing typical returns since 1985.
In the short term, oil typically pulls back the following week, showing an average return of -1.73%, with 42% of the returns positive. The average positive and negative returns after these spikes are about twice in magnitude compared to the typical average positive and negative.
This indicates a significant increase in volatility. Once you get past that first week, however, the returns become higher than usual. In the longer term, there tends to be more upside potential, with the average positive return being significantly higher than the typical average positive return.
Oil commonly becomes volatile based on global events, with weekly oil spikes usually happening in clusters. This recent spike, however, was the first in almost three years.
If I consider only oil spikes that were the first in at least a year, there are 15 instances. The subsequent oil returns are summarized below. The short-term underperformance is even more pronounced in those instances, with oil averaging a loss of 3.73% over the next week and a 1.09% loss in the next month. Again, oil tends to move higher than usual in the longer term after the initial underperformance.
I also decided to look at how stocks have performed after these weekly oil spikes. Stocks have tended to outperform compared to their usual returns since 1985. In the month after oil spikes, the S&P 500 Index (SPX) averaged a return of 1.09%, compared to its typical 0.78% return. The one-year return for the index is especially impressive, with an average return of over 20% and 90% of the returns positive.
The stock returns are very different when you only consider the first oil spike in at least a year. In these cases, stocks significantly underperform in every timeframe out to six months. Six months after a weekly oil spike, the SPX averages a return of just 1.82%, with 60% of the returns positive. The typical six-month return for the index is about 5%, with 74% of the returns positive.
