How Stocks Tend to Behave After Large Weekly Oil Gains

• Oil averaged -5% returns in the week and month following past 15%+ weekly spikes, but rebounded to 5.95% average returns at six months with higher upside potential (27% average positive return) than downside (-15%).
• The S&P 500 underperformed after oil spikes, gaining just 2.77% over six months versus the usual 5.13%, with positive returns only 40% of the time compared to the typical 75%.
• Options activity in USO oil ETF showed unusual heavy put buying (call/put ratio of 0.91) at five times normal volume, potentially signaling contrarian bullish sentiment if investors are overly bearish.

Market Summary: Historical Analysis of Oil Spikes and Stock Performance

Key Event

Oil prices surged 35% last week following U.S. and Israeli military action against Iran, marking the second-largest weekly oil gain on record since 1985. The largest weekly spike (referenced for comparison) occurred in April 2020 when Saudi Arabia and Russia ended their price war.

Historical Pattern Analysis

Analysis of 10 instances since 1985 when oil jumped 15%+ in a single week reveals:

Short-term oil outlook:

• Average decline of 5%+ over the following week and month
• Only 20% positive returns in this timeframe
• Increased volatility typical after major spikes

Medium-to-long term oil outlook:

• Better-than-average returns after 3-6 months
• Six-month average return: 5.95% (50% positive hit rate)
• Average upside of 27% when positive vs. 15% downside when negative

Stock Market Implications

The S&P 500 Index (SPX) historically underperforms following oil spikes:

• Six-month average return: 2.77% (vs. typical 5.13%)
• Positive only 40% of the time (vs. normal 75%)
• Underperformance persists from four weeks to six months post-spike

Options Activity

The United States Oil Fund (USO) showed unusual options trading:

• Buy-to-open volume 5x higher than the three-month average
• Put/call ratio of 0.91, indicating more put buying than calls
• Contrasts with four previous oil spikes where calls dominated, potentially suggesting bearish sentiment

Market Implications

Historical data suggests near-term oil price weakness followed by recovery, while equities face extended underperformance during adjustment periods.