Academic research confirms it is and what’s more – it shows that oil isn‘t the only commodity with prediction ability (prices of some industrial metals could also be used as equity indicators). Higher oil prices predict lower future equity returns and vice versa. Therefore simple market timing system which is using oil prices as an indicator to time equities can be constructed.

The source paper written by Driesprong, Jacobsen and Maat can be found on the following web page: http://papers.ssrn.com/sol3/papers.cfm?abstract-id=460500

Indicative performance is nearly 12% and estimated volatility is less than 10%, therefore this strategy offers an atractive Sharpe Ratio of 0.81.

Our strategy overview with extracted trading rules and hypothetical performance chart with probability bands can be accessed here: http://quantpedia.com/Screener/Details/96