timwest
Long

30 Years of Crude Oil and Stock Market Action is bullish

INDEX:DOWI   DOW Industrials
3065 21 50
9 months ago
Note the 69%, 66%, 61% 76% drops in crude oil             prices going back to 1986 and see how those drops impacted the future of the stock market . We don't know with certainty that this pattern will continue, but it is interesting to look at the market and see what you can learn from what has happened in the past.

In 1986, crude oil             crashed from the $30 level and dropped down to the $10 level and created a solid level of support that held the 1987             crash in late 1987             .

The 1991 drop in crude oil             was a solid platform where prices advanced from without much downside risk.

The 1994 ultimate bottom in crude oil             proved to be another launching pad for what was to be the internet bubble from 1995-2000.

The 1998 drop in crude proved to be an important drop because it held the 2002-2003 bottom and later on it also held the 2008-2009 bottom too.

The current drop is taking awhile to form a base, but the psychology is very similar.

Post your version of this chart or your comments.

All the best,

Tim

2/24/2016 DJIA             16407 last, S&P500             1920
9 months ago
Comment: I had these charts lined up when I published them, but they shifted. The start of the green box for the S&P matches up to the high in crude oil. I think the 1986 analogy is the best analogy to the current market.
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coondawg71 PRO
9 months ago
snapshot


Agreed, the Oil vs Equities correlation is coming back in full swing.
+2 Reply
MHIGUERA coondawg71
9 months ago
agree! thanks for charing!
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The works of a True Master Chartist! Im humbled!
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alex.a moorekapital
9 months ago
^_^ agree
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My two premises on oil....
snapshot

snapshot


Great correlation Tim....I agree with your view.

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RIKONIKO
9 months ago
Very good analysis!!!
+1 Reply
nbk PRO
9 months ago
Great analysis.
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blackswan nbk
9 months ago
if this is true then this could be one last pony trick to juice the market. although manipulating oil price to ignite the rotten market is a barrel shot it seemed to work on the last fake-out rally..
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nbk PRO blackswan
9 months ago
Waiting to cash on the pony trick :)
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timwest PRO blackswan
9 months ago
I think the next trick will be an Investment Tax Credit, similar to the ones used by Ronald Reagan in 1982 to get the economy rolling again. It was called the ITC and was very popular and worked quickly to jump-start the economy.
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Realisto_FX PRO
9 months ago
My 2 cents, it´s OK just as for reference, however I don´t think it can provide a clear conclusion to decide :

1. Traditional extraction costs are higher now than 30 years ago with the incorporation of US shale new low cost techiniques in the equation, with big impact in US economy & USD
2. Market now is very well sourced while in 30 years it was under OPEC monopoly
3. Oil is a finite resource, & the economy is finding its way using alternative energy sources , so there should be less and less correlation in the future

I hope it helps
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timwest PRO Realisto_FX
9 months ago
Thanks for your comments - I don't think alternative is a very big percentage of the supply at the moment - perhaps 2% at the moment. Feel free to check for the accurate answer. There are so many variables indeed to forecast the stock market. As for extraction costs, I don't think extraction costs are up, in fact, I think they are down. The big point to remember is that energy is about 6% of our economy and it got up to about 10% or more when prices soared. That is a very real drain on our resources and our ability to grow. The US is facing demographic challenges which means that we will consume less energy in the future because our population is aging. Either way, this analysis I presented gave a pretty specific bullish scenario in a world of "chicken littles" who are forecasting that the sky is falling.
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2use
9 months ago
Did you meadn Dow? "The start of the green box for the S&P"

Also, about bottoms that lead to further raise in the markets. In 2008 (and possibly the rest) what was the reason for the Oil Drop? Because i feel that then everything dropped with the collapse (gold including). So i'm not quite sure what dictated the bottom there - oil, or markets to oil?
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timwest PRO 2use
9 months ago
Right - S&P or DJIA - almost interchangeable.
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timwest PRO 2use
9 months ago
Can you re-state your question about 2008?
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2use timwest
9 months ago
It seems that the markets started going down before oil did in 2008. So i wonder if that invalidates the idea in a way because the reason for the drop i think is also important to study i think
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timwest PRO 2use
9 months ago
Oil was the driving factor that popped the stock market bubbled back then. Oil was destroying the buying power of Americans who were moving further away from their work and building bigger houses, both of those elements consumed more oil. Oil's rise shaved off a month or two of discretionary income for the average American, which reduced buying power for houses. In my opinion, rising oil was one of the key factors to pop the housing bubble. The biggest factor was the change in regulatory leverage in the financial system that forced banks to stop lending to real estate right when the most number of speculators were long on real estate and everyone else had leveraged to the maximum with no income verfication loans. It was all a great setup.
+1 Reply
ShirokiHeishi PRO timwest
9 months ago
Just an interjected opinion, it is my understanding that the oil price is a direct function of supply and demand. Has demand increased or supply decreased in any meaningful way. Bubbles happen due to irrational exuberance. 0% down ninja mortgages and the like for someone who can't afford the house they bought is what crashed the real estate market. Banks wrote bad loans to bad borrowers because it was easy. Oil drillers spent as much as they could to extract petrol product because the price was unreasonably high. Car sales are through the roof, who is buying new cars, with ~60% labor participation and 25+ hour workweek? The same folks who bought a $200K home on 40K salary with an ARM and almost no down payment. Next bubble folks. The only correlation I see is the banking/regulation sector generating bad loans to bad borrowers. History doesn't have to repeat but it can rhyme. Oh yeah I almost forgot to mention, The middle class has been taking it in the gut for awhile now (the fastest growing industry in the country collapsed, no spending from them, inflation figures are a lie The Fed balance sheet hasn't been audited in what 6+years, wonder where all those toxic loans are at that the banks removed from their books. There are many reasons to not believe this economic recovery is solid, so I guess I agree with you then about bubbles being popped, but not oil this time. There are other sharper pencils within the Fed doing that this time. Have a great day
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timwest PRO ShirokiHeishi
9 months ago
Oil demand is magnified by speculators and can be hard to measure in the short run. Short term imbalances can be substantial and can drive price far beyond long term equilibrium. As for what caused the bubble to pop in real estate, it was a lack of new buyers along with higher taxes at the local level (taxes doubled from 1997 to 2005, cutting spending back by another month of spending on a mortgage), lower leverage allowed at banks (leverage used to be 30:1from 1997and was cut to 11:1). Not many discussions center on what caused the bull market in real estate: Here's the answer. 1. Maximum number of 46-49 year olds in the economy, ever. This age group spends the most on housing and you had the highest number and highest proportion ever in the US from 2001-2005. 2. Clinton's $500,000 tax free capital gains for principal real estate every two years!!! 3. Aggressive lending by banks and increased leverage allowed by Government regulators (read as - "The Gov't wanted a bull market in real estate"). 4. Human greed cycle. What you may not have known is how profitable it was for banks to "take back properties" over the previous 10 years PRIOR TO the big bust in prices. Essentially, banks made a very profitable business when someone stopped paying on their loan. Why? Prices were rising back then. If the person stopped paying after 2-3 years and had put 5%-10% down, well, there was a monstrous profit from taking the property back and selling it that yielded 5%-20% of the banks profits back then. THAT is why banks wanted to be in the business of lending to a bull market in real estate. The more aggressive the profits, the more competitors came into the field and helped drive up the last leg of the bull market where you saw no-doc loans and loans at 10-15 times income. Keep in mind, that when Japan's real estate bubble peaked in 1989, their loans were for 75 years and longer (multi-generational loans) and were at extremely low interest rates (1%-2%). So, you can imagine how high their prices were able to climb with that type of mortgage and interest rate. That's why real estate there is still way down from the peak and why stocks are down too. And about your "toxic banks/Fed" comment: The real estate market bottomed when the banks could go back to keeping their assets on the books at the higher of cost or market value. That allowed new loans to flow and to generate some support for prices, which would lift the value of real estate for the banks holding mortgages. Sometimes the system needs to do what it needs to do to stay afloat. The key is to just understand what happened and not get mad at it since you don't really have any control over it. It's like getting mad at a tidal wave - it's much better to get out of its way or ride it if you can!! ;-)
+3 Reply
ShirokiHeishi PRO timwest
9 months ago
Thanks, greed and profit are key drivers in the market good points. I guess I wasn't clear about the origin of the toxic paper. Fannie and Freddie, guaranteed by the Fed's balance sheet still haven't been addressed yet. I think it could be a real problem when/if the Fed balance sheet gets an actual audit. And you are right to not be mad at a tidal wave, it is just frustrating to see it so clearly that the cycle of boom bust keeps involving the same parties and I need to keep bailing them out, because they ignored the high water mark from the last tidal wave.
Sunlight always disinfects.
As always your comments are insightful and appreciated.
Good day
+1 Reply
2use timwest
9 months ago
Had to give it a point for the good read.
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