Nasdaq vs. Homebuilders vs. Oil

The price of oil has risen 729.58% from its low on November 19th, 2001 to its closing high of $138.54 on June 6th.  When compared to the tech bubble of the '90s and the real estate bubble earlier this decade, oil's rally is just about in between the two. 

As shown below, from the Nasdaq's significant bottom on June 24th, 1994 to its peak on March 10th, 2000, the index rallied 639% over 2,086 calendar days.  From its bottom on March 14th, 2000 to its peak on July 20th, 2005, the S&P 1500 Homebuilder index rallied 839% over 1,954 calendar days.  Surprisingly, oil's rally is now longer in duration than both the tech and real estate bubbles at 2,391 calendar days. 

As we all know, the tech and real estate bubbles eventually burst and fell by as much as they rose.  Their declines were very similar in both duration and size as well.  While significant gains in any asset class carry their own set of circumstances and positive arguments, it's hard to look at this chart and not expect to see oil's red line come down significantly at some point.  The demand argument for oil might be strong, but there were no shortage of "demand" arguments during prior bubbles either.

click to enlarge

Note: we always maintain a certain allocation to commodities in our all-ETF portfolios, with regular rebalancing to keep the allocation inline.

Comments

[DaveW:]

You'll probably get a lot of heat on this one. It's very interesting to contemplate 'real vs. bubble', only in hindsight will we know if it is similar to or truly different this time....
Like your data crunching, keep it up!

2008 Jun 12 02:24 PM

[me3tv:]

nasdaq and homebuilders are essentially creating and then destroying demand for oil. It seems to follow - just as the charts you present show. We shall see. Oil appears at a tipping point just now. thanks for the insight.

2008 Jun 12 02:44 PM

[Mark of London:]

The main driver for the oil price is no longer demand, but supply. Even the IEA has finally recognized the foolishness of making forecasts based on demand. The IEA is about to post their July Medium Term Oil Market Report which may offer a preview of the bad supply news coming when they release WEO2008 in November. Anyone in the business hates to say it is different this time, but where is the supply response? IT IS DIFFERENT THIS TIME because for a variety of reasons- above ground and below ground- the supply response is extremely muted despite a clear price signal. People are going to agonize over falling demand but this falling (OECD) demand is forced first by sharing limited production growth with new consumers and next by falling oil production. Actually the demand is there if we could bring on more supply at $75/bbl...what we have is a constraint on consumption because we can't burn what we don't have. Get used to the idea of falling consumption, falling production AND higher prices.

2008 Jun 12 06:25 PM

[dieuwer:]

Let's put this in a somewhat longer perspective.

In 1982, after a decade long run from a low of about $4, the price of oil peaked at about $40. A 10-fold increase. At the peak, the DOW/OIL ratio was at 25.
Today, oil is at about $140 coming from a low of about $10 during the late 90's, a 14-fold increase, while the DOW is at about 12100. This gives a current DOW/OIL ratio of about 86.
Although the gains of oil in the 21st century so far are much larger than during the 70's, the DOW/GOLD ratio is actually higher now, implying CHEAP OIL compared to the DOW.

Conclusions: 1) The much larger rise in the price of oil in the 21st is for a large part due to hyperinflation. 2) The DOW/OIL ratio eventually will drop to the mid 20's, implying a much higher oil price. Even with a DOW crash to say 8000, it implies an oil price of at least $300.

2008 Jun 12 07:43 PM

[you_can_cal...:]

We have become more of a service economy and less of a manufacturing economy since then. I like your thinking, but without quantifying that aspect then we're missing a big piece of the puzzle.

2008 Jun 12 11:28 PM

[nyinvesting...:]

This article is comparing apples to oranges and is ridiculous. While a Nasdaq comparison is reasonable, the Nasdaq rally began in 1982, not 1994, with the beginning of a secular bull market that lasted 18 years. There is no reason the oil rally can't last 18 years as well and that commodities are in an 18 year secular bull market. The oil rally actually began at the low in 1998, so that would give it a potential 8 more years (if you wish to date the beginning of the secular bull in 2001, then 11 more years) based on the reasoning of this article. As for comparing homebuilders, the factors that affect their prices are not the same as those that woudl affect the price of a commodity. That comparison is completely invalid.

2008 Jun 16 10:55 AM