Tuesday, October 09, 2007

Stocks and Oil: Charting a Burst Bubble

Above we see a daily chart of the Dow Jones Industrial Average priced in barrels of West Texas Intermediate crude oil (cash prices). We can see that from the mid-1980s through early 2000, we had a regime in which equity prices were rising considerably relative to energy prices. Since 2000, however, the regime has gone the other way, with crude oil handily outperforming stocks.

When we price one asset class in terms of another, we gain a perspective on relative strength and where capital is flowing. The year 2000 marked a watershed in which capital flowed away from financial assets and into tangible, commodity assets.

When we think of a bubble bursting in 2000, we generally think of tech stocks. The chart above suggests that a larger burst of a financial asset bubble also occurred, obscured only by the fact that we tend to denominate stock indexes in dollars, not alternative assets.


A Mechanical Strategy That Has Consistently Worked

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