Crude oil and yields signal a bullish scenario for stocks again

Key points:

• Over the last five sessions, crude oil has fallen over 10%, and long-dated Treasuries have risen more than 1%
• Similar precedents produced outstanding returns and consistency for the S&P 500 regardless of the environment, with 85% of signals positive a year later
• Communication Services, Technology, and Consumer Discretionary outperformed all other sectors following similar instances

Crude oil and yields down equal risk-on for stocks, once more

If you're searching for an explanation for the resilience in stocks despite elevated macro uncertainty, the 10% drop in crude oil prices over the past week is the most likely factor. The decline has sparked a chain reaction, causing long-term Treasury prices to rise, which has driven investors to rotate into equities. The combination of lower oil and lower yields presents a favorable situation that history says is worth paying attention to.

To capture this scenario, I applied a 5-day rate of change to the 20+ Year Treasury ETF (TLT) and the Crude Oil ETF (USO) and then calculated the spread between the two. On Monday, the spread surged above 11.6%, marking the widest reading since April and triggering the same signal that has fired 66 times since 2008.