Market Strength: Oil and Bonds
AAA
  1. Market Strength: Introduction
  2. Market Strength: S&P 500 Futures
  3. Market Strength: Advancers to Decliners
  4. Market Strength: Relative Strength Index and Arms
  5. Market Strength: Oil and Bonds
  6. Market Strength: Conclusion

Market Strength: Oil and Bonds


The price of oil and bonds as they relate to market strength is a wide topic, but these are two areas tend to have a large influence over the markets. In this section, we will address the basics of using the prices of these vehicles to determine market strength.

Oil
Energy is one commodity that affects every company in one way or another. For example, the price of wheat makes a greater impact on agriculture stocks, but oil influences everything from the cost of electricity and heating, to the cost of production and transportation. When the price of commodities, and particularly oil, is on the rise it signals that inflation is starting to become apparent. The day-to-day price fluctuations won't cause inflation fears, but the long-term trend will. If the price of oil has been steadily increasing, it could cause investors to be fearful that inflating energy prices will slow company profits.

The price of oil has an opposite effect on those stocks directly influenced by the price of oil. Drilling, pipeline and retail distribution of energy stocks tend to have an extremely high correlation to the price of oil.

Bond Prices
Ten and 30 year bonds, along with interest rate futures are another indicator used by many investors to gauge the strength of the stock market. As you may already know, if bond prices are going up, then yields are decreasing. This decrease in yields causes investors to search for other areas in which to invest their money at a higher return - this usually means the stock market. On the other end of the equation, lower bond yields means that interest rates are low and companies will find it much cheaper to borrow money and finance expansion or growth.

While bond and oil prices might not be as accurate and current as the S&P 500 futures, they are the useful when looking at the overall condition of the economy and, more importantly, at the trend of the stock market.

Market Strength: Conclusion

  1. Market Strength: Introduction
  2. Market Strength: S&P 500 Futures
  3. Market Strength: Advancers to Decliners
  4. Market Strength: Relative Strength Index and Arms
  5. Market Strength: Oil and Bonds
  6. Market Strength: Conclusion
RELATED TERMS
  1. Financial Singlularity

    A financial singularity is the point at which investment decisions ...
  2. Revenue-based Financing

    Revenue-based financing, also known as royalty based financing, ...
  3. Precedent Transaction Analysis

    A valuation method in which the prices paid for similar companies ...
  4. Bjerksund-Stensland Model

    A closed-form option pricing model used to calculate the price ...
  5. Cape Cod Method

    A method used to calculate loss reserves that uses weights proportional ...
  6. Kenney Rule

    A ratio of an insurance company’s unearned premiums to its policyholders’ ...
  1. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Discover how the fixed charge coverage ratio is useful to investors and analysts, and when it suggests that a company should ...
  2. What is the difference between the return on total assets and an interest rate?

    Learn the difference between the return on total assets and an interest rate; the former is a profitability ratio, and the ...
  3. What is the utility function and how is it calculated?

    Learn what the utility function is in microeconomic theory and how it is calculated based on a functional form that represents ...
  4. How can EV/EBITDA be used in conjunction with the P/E ratio?

    Learn how traders and analysts use the two equity evaluation metrics, EV/EBITDA and P/E, together to obtain a more complete ...

You May Also Like

Related Tutorials
  1. Fundamental Analysis

    Ethical Investing Tutorial

  2. Investing Basics

    Industry Handbook

  3. Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  4. Fundamental Analysis

    Discounted Cash Flow Analysis

  5. Fundamental Analysis

    Ratio Analysis Tutorial

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!