Is Oil Predicting a Stock Market Crash?

Back in March ‘03 when my predictor’s turned bullish it was difficult to get anyone to listen, everyone was extremely bearish. Now it appears that a recent survey says 80% of market participants are bullish. Is it time to become bearish?

In January of ‘03 Oil prices spiked up 76.82% fro the previous January. Should we be worried a year later?

There has recently been some speculation on the correlation between a sharp rise in Oil prices and a sharp fall in Stock prices. I would like to take a moment and show you the actual data so you will be prepared. The way the theory goes is that a sharp increase in oil prices on the magnitude of 50% to 100% annual increase has historically resulted in a sharp decline in the stock market price.

Logically speaking there is some good reasons why this might be the case.

1) A spike in Oil prices introduces uncertainty into the market.

2) Higher Oil prices increases transportation, heating and production costs.

Given both of these factors it is quite logical that increased oil costs could result in a decline in the stock market. So I have prepared a chart comparing the annual percent increase in Oil prices with the annual percent increase in the NYSE.

Recently the Oil price peak in February of 2000 was accompanied by the most recent stock decline.

Note that each “Red Arrow” points to a peak in the oil price above 50% and each was followed by a decline in the NYSE rate of return. Each “Red Line” indicates the decline in the NYSE. Remember that the NYSE Chart is not the price but the percent increase, so a 0% increase would indicate a flat stock market.

There are also two “Pink Arrows” that are peaks that are very near 50% and the peak in October of 1989 was accompanied by a simultaneous market decline while the peak in October of 1996 was also followed by a steep decline 17 months later. So it appears that the two “Pink Arrow” peaks are less reliable timing indicators than those that are higher peaks but still appear to have some validity.

Statistically, we can see from the table below that the delay after an oil peak was any where from two months to 17 months with the average delay being around 12 months.

So what does that mean for today? With the most recent Oil peak having occurred in January of 2003 we are in the prime season (through April 04) for another oil related market slump, so caution is advised.

http://www.fintrend.com/ftf/Articles/OilCorrelation.asp