Bear Market Blues? — Oil Stays Up; Stocks Fall
Kurt Brouwer July 1st, 2008
The first half of the year is over. Stocks, bonds, real estate and even the dollar have had a tough six months. But, oil is riding high. For some time now, the story has been that oil prices soar while the stock market tumbles and the dollar slides further. We are not quite in ‘bear market’ territory for stocks, which is a 20% + decline from the most recent high point. Though we are not quite there, it’s painfully close. This piece from the Wall Street Journal, [registration may be required; emphasis added] tells the tale:
Stocks Skid, Oil Soars (Wall Street Journal, June 30, 2008, Peter A. McKay)
A chaotic three months for Wall Street ended with a whimper on Monday.
Stocks sputtered across 2008’s halfway mark, with major indexes making only modest moves following a sharp two-day selloff at the end of last week. That plunge delivered the Dow Jones Industrial Average to the brink of bear-market territory, but investors appeared disinclined to give blue chips a final shove as they closed the books on a brutal second quarter. The Dow is down 19.9% from its October 2007 record high.
The industrials eked out a slim gain of 3.50 points to end at 11350.01 Monday, virtually unchanged in percentage terms. Despite the small climb, the blue-chip yardstick had its worst June performance since 1930 and ended the quarter with a 7.4% decline.
The S&P 500 rose 0.1%, or 1.62 points, at 1280.00, leaving it down 3.2% on the quarter. The Nasdaq Composite Index fell 22.65 points, or 1%, to 2292.98. It was held back by declines in tech giants like Research In Motion, which fell 3.4%. The Nasdaq advanced 0.6% in the quarter but remains down 19.8% from its multi-year high hit last October.
…Such worries continued to simmer Monday as oil hit a fresh intraday record near $144 a barrel. Oil trimmed its gains to finish nearly unchanged, at $140 in New York, but crude gained 38% on the quarter and is nearly double its level at this time a year ago…
The market action in both oil and stocks illustrates George Soros’ concept of reflexivity almost perfectly. Soros wrote in his book, The Alchemy of Finance (Wiley), that markets are inherently reflexive. That is, buying begets more buying until a peak is reached and then selling begets more selling until a bottom is reached. A market that is hot (oil) will continue to attract buyers who act under the belief that it will keep going higher and higher. A market that is cold (stocks) will continue to freeze out even the most patient buyers because they think it may keep going down. Of course, neither belief is correct. No market (such as oil) grows to the sky, but no market (such as the stock market) falls to zero either.
We do not know how far stocks will fall, but eventually all the sellers will have sold and the market will rally. Similarly, at some point, the price of oil will falter due to a combination of weakening demand and increasing supply. Again, we do not know how far up it will go before that point is reached, but reached it shall be.
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Quite an incredible high wire act oil is pulling here. With all these steep appreciation in recent days, you’d expect some pull back, we’re not seeing it.
Oil aside, it is looking very bad for stocks as the economy is heading for a tumultous period ahead.
Yes, the price of oil is on a roll right now. Reminds me of some of the technology stocks in 1999.
There may be trouble ahead for stocks, but they are already down over 20% so they have already had a rough time, which has been driven by the depression in media, finance and homebuilding stocks.