Cory, while the Treasurie's Plan is EXPECTED to cause inflation, the fact of the matter is that we are still in a highly deflatioinary environment.

Moreover, it is most likely that the United States will be the first country to recover from depressed economic activity. Given such a prospect, money will flow back into the US and the Dollar will see strong demand.

I know it's counter-intuitive, but I'm just pointing out that all of the dollar weakness that the "Gloom & Doomers" have been predicting may not actually happen.

While there appears to be an inverse correlation between Crude Oil and the USD of about 75% since 2002 - - - that "correlation" doesn't give one any indication that the change in the value of the Dollar against the Euro will represent a CONSTANT portion of the change in the price of Crude Oil!

"For example, if the dollar falls 10%, the price of oil in dollars does not automatically rise 1%, 10%, 20% or by any other constant factor.

n 2002 the percentage increase in oil was a bit more than three times the fall in the dollar against the euro (oil rose 50.1%, the dollar fell 16.4%). In 2003 the relationship was reversed, the dollar fell almost three and a half times the percentage that oil increased (dollar -21.1% vs. oil +6.1%). In 2004 the difference reversed again at a factor of 3.4: The dollar lost 7.3% against the euro, and oil rose 24.7%.

In 2005 and 2006, the oil price moved in tandem with the dollar. The dollar and the price of oil rose in 2005, and both slipped in 2006. In 2005 the price of oil accelerated four times the amount (in percentage) of the gain of the dollar against the euro (the dollar gained 12%, oil added 51%). In 2006 the relationship was almost equal: The dollar lost 12% against the euro, and the price of oil fell 8%.

Again in 2007, the inverse relationship reasserted itself but now at a factor of 6.18, (the dollar fell 11.5% against the European currency, while oil shot up 70.8%). In 2008 the dollar fell 9% (at the low of $1.6037), and oil gained 46.2% (at the record crude price of $145.66). Through July 29, the dollar had regained 2.8% against the euro, but oil has sunk 16%.

Approximately three-quarters of the time since January 2002 (five years out of seven) the dollar and oil have moved inversely to each other. But even in those five correlated years, the factors are wildly disparate. If we take the percentage of the rise in oil against the decline in the dollar against the euro. the ratios are as follows: 2002, 3.09-1; 2003, 1-3.49; 2004, 3.38-1; 2007, 6.18-1; 2008 (to July 29) 3.81-1.

Even if we ignore the two years when oil and the dollar moved in the same direction, the correlation between the value of the dollar against the euro and the dollar price of oil is directional at best. It does not have any predictive value for the degree of change."

the market for a matter of fact must test 725 before deciding to go higher or lower. oil will retrace then and then its a wait and see game. the dollar during the market fall to 725 will be higher so..... that means that oil will be lower cuz the demand for it is bad. therefore short oil for now and wait and see @725.

Robert,

You nailed it. Again, oil is correlated with the dollar, not the US Equity Market. The Treasury's plan is expected to cause inflation (which isn't a bad thing in an environment of deflation) but the market that suffers will be the dollar.

There's more cross-currents going on than in 'normal' times and it would behoove us to see inflation.

The stock market would likely rise once commodities started going up, but how long and how fast is yet to be determined.

Jeremy,

True, we are seeing strength in commodities across the board but it's mainly due to a weaker dollar. Commodities roughly are correlated (inversely) to the dollar more than the equities market. If you do a long-term study of Oil and the S&P;, one will find no correlation. Sometimes it will trade lock-step, other times not. Generally the 'lock-step' occurs when both markets are falling.

I'm still of the opinion that the stock market will see a very decent rally perhaps up to 1,000 or 1,000 after we get a test of the lows, and that could be a catalyst for higher oil prices (and commodities) across the board.

But you said it - this is a difficult time to be trading intermarket relationships.

GTM,

It would scare me to see us going much lower than 650 here (immediately) on the S&P; 500.

And there's some undercurrents I'm picking up from leading economists slamming Geithner's new "Zombie Bank" plan (details were leaked) so if the market rejects that, we could see a swift decline. Details will (finally) be released this week.

One catalyst for the rise in the price of oil will be a fall in the US dollar. Oil is priced in dollars. Oil has traditionally always been a hedge against inflation which is exactly what the Federal Reserves monetary policy is creating. The Fed is creating inflation in an attempt to fight the deflationary forces at work in the market, i.e. housing market. Commodities in general, but especially oil, should see a boost by the Fed's policy, coupled with a fall in the value of the dollar. Even though the economy as a whole is still in terrible shape and the indexes may still be in a long term decline, other forces are at work which impact the price of oil. In an attempt to prevent a Deflationary recession/depression, the Fed is creating an Inflationary recession/depression.

Oil and Copper are making new short term highs, a higher oil price now is very correlated to a higher S&P500, but that i suppose does not mean that they cannot diverge but the probability of them doing so is low.
I would of thought the market will trend lower as it's still fundamentaly overvalued, but will rally strongly periodically as upside surprises come through-a very hard to trade enviroment!

I think we will see far more than a test of the lows again. Here is my latest look at the financial collapse and where I think we're heading. It is grim.

"Official speeches to assure investors and prop up the markets have routinely come ahead of financial disasters. The following will uncover some of reasons why CBS, Bernanke, the Fed, and other members of the power Elite are lying to you. We will then explore the mechanics of how a total Fed collapse can happen. And we’ll end with a review of how a stronger police state is being formed."

Our Engineered Meltdown: End of the Beginning
http://www.gamingthemarket.com/2009/03/end-of-the-beginning.html

Anon,

Not saying that it will, but it does seem to have 'open air' chart space above the break-out point, coming off the multi-swing positive divergence and rounded reversal. Using technical analysis, one could make a strong case odds favor higher oil prices (to lower) here. Fundamentally, that might not be the case.

The $70 zone would be a likely 'magnet' chart target thanks to multiple sources of moving average confluence on the weekly and daily charts.

I'm sorry, but there is no way that crude is able to rally back to the 38.2% retracement ( high $70's ) without the stock market participating along with it on the UPSIDE.

Strength in crude is ONLY going to come from stronger demand, and the only way that will happen is if there is growth in the Economy, both here and abroad.