Cramer: Linkage between oil & stocks about to snap

Lately, it seemed to Jim Cramer that the crazy linkage between oil and stocks would last forever. Whenever oil would go up, the market would rally; whenever oil went down, stocks were crushed.

“That is lunacy, as I’ve said repeatedly, because the vast, vast majority of companies in the S&P actually benefit from cheaper crude,” the “Mad Money” host said.

Many investors believe that since the oil industry has become a lot larger than it used to be, the weak demand for oil could be a sign that the U.S. is headed into a recession. However, Cramer does not agree. He believes the price of oil is all about a supply glut and very little to do with demand.

Cramer finally saw some light at the end of the tunnel on Wednesday last week, when for the first time in ages, it became clear that the stock market and oil futures were trying to decouple.

That is why Cramer spoke with Carley Garner, a technician, commodities expert, co-founder of DeCarley Trading and a colleague of Cramer’s at — to get a sense of when the linkage between oil and stocks will finally snap.

Garner first pointed out that historically there does tend to be a moderate correlation between the market and oil futures. But in the past 30 days, the two have moved in the same direction roughly 95 percent of the time.

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Typically, the correlation coefficient between oil futures and the S&P 500 is around 30 percent. Given the hopeful signs seen last week that oil and stocks are capable of trading in different directions, Garner believes that crude and the S&P will continue to decouple.

Once that occurs, Garner thinks the market could potentially see a bottom in both oil and stocks, as traders become more comfortable that the two are able to separate.

Garner thinks that it will take more time for the oil market to sort itself out, and she believes that the floor of $26 for crude will hold. However, she added that the $26 lows are likely to be tested, and that means the S&P 500 could trade lower in lockstep.

While Garner did not try to predict the level where oil will bottom, she does say that prices this low are simply unsustainable in the long run.

As for the S&P 500, she thinks it has become emotional and recommended to prepare for one more dip before things calm down again. Based on the monthly chart of the S&P 500, Garner said that a pullback to the low 1,800s could happen, but won’t rule out a temporary plunge to 1,720. Ultimately, she predicts that the market will go lower first before it can begin to go higher again.

It is still too early to call a bottom in oil or stocks, but Garner says the charts suggest that oil futures and the S&P 500 might finally be ready to divorce from one another.

“That on its own would be a major positive, exactly as we saw in today’s session,” Cramer said.

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