StockWatch
Oil Bubble?
Go figure.
It used to be taken as axiomatic that oil and equities moved inversely to each other. As recently as five years ago, for example, an academic study found that an investor could have easily beaten a buy-and-hold in the stock market over the previous three decades by following a simple rule that calls for being out of stocks whenever oil, in the previous calendar month, rose by at least 5 percent.
And, yet, somebody forgot to refresh the stock market about this axiom. Though crude oil keeps barreling higher, closing in fast on the 100-dollar mark as this is written, the stock market seems, at worst, to be only mildly worried. The Dow Jones Industrial Average is less than 10 percent off its all-time high.
It seems fair to say that stocks and oil can’t keep going forever.
But, if that’s the case, which market is going to blink first -- stocks or oil?
The nearly universal consensus among the nearly 200 newsletters monitored by the Hulbert Financial Digest, as well as from various investment-oriented blogs I read: Stock investors are the ones who are in denial right now. Investors in the oil market, in contrast, are on solid ground.
Of course, any position that held this consensus universally triggers a contrarian reaction, and this one is no exception. Richard Band, editor of the Profitable Investing newsletter, who pursues more of a contrarian approach than almost any of the newsletters I monitor, thinks the consensus is dead wrong.
Band thinks the oil market is forming a bubble.
This is what Band recently had to say about the oil market: “Six years ago, in the wake of 9/11, West Texas crude sold for less than $18 a barrel. It has since skyrocketed five times -- a fantastic rise by almost any historical standard…”
“Of course, we all know the standard explanations. China and India are gobbling up the world’s incremental oil output. The Federal Reserve’s loose monetary policies have trashed the dollar…and ongoing geopolitical tensions have only heightened the speculative appeal of hard assets generally.”
“All these things are true. Yet, it’s also true that markets tend to exaggerate the impact of well-known economic factors. Indeed, when “everybody” seems to know the story by heart, the trend is likely due for a significant interruption.”
To be sure, knowing that the oil market is forming a bubble tells us little about when it might burst. Many have been predicting an oil bubble for some time, and, so far, they have been wrong.
Nevertheless, as Band points out, “market momentum has a habit of lasting longer than most rational observers expect....this bubble, like the others before it, will eventually burst, with painful consequences for investors who overstay their welcome.”
And, we need only recall the bursting of the Internet bubble in March 2000 to appreciate Band’s comments. After all, for a number of years leading up to that bursting, an increasing number of advisers and investors alike became convinced that a bubble was indeed forming. But, Internet stocks kept going ever upward.
To be sure, just because it is possible that oil is forming a bubble doesn’t mean it is. But, if you are among the overwhelming majority who currently thinks the oil market is right and the stock market is wrong, you might try on for size the possibility that maybe, just maybe, the reverse is the case.Mark can be contacted via email at mhulbert@marketwatch.com.
