Looking at the six month charts, we can see the periods leading up to that Dow Jones crashes as a result of speculative bubbles in 2000-2001 and 2015. Both major drops are over 30% and backed with intense volume data. Another technical similarity is the amount of time drops of over 1000 points took to reach their bottoms, both in less than two weeks. The brevity of the sell-offs spells out how dangerous corrections can be to anyone’s portfolio. Just as the characteristics of the drop are similar, the retracements immediately following the bottom can be compared as well. Retracements that occur this quickly are typically the result of long positions being made as resistance levels are established across the market. These “stable” signs of tapering off volatility inform traders that the correction has found a value acceptable to the fundamental situation. Therefore, it is also important to note the lengths of volatile movement that precede the surety of the drop. Now that we’ve realized a connection between the dot com correction in 2001 and the Chinese correction in 2015, I’d like to observe WTI price movement in order to gain insight on the ambiguities in the energy markets today.
It may seem frivolous to look at charts that don’t appear to be related to the technology bubble, but we may be able to make observations about the overall economy’s reaction to the bubble. One similarity can be seen in the short term reaction to the speculative bubble popping. After a week or two of futures trading, a small sell-off can be seen tacked on to movement from before the dip. Before this small period, movement does not lend itself to a comparison. Although a 50-day moving average suggests similar movement, the patterns are actual very different for an obvious reason. Despite the fact that stocks were overvalued in both situations, the 2015 crash was part of an ongoing complication in crude oil supply, a major glut that had sent prices through the floor. WTI downward trends in 2001 may only be a result of demand data that was influenced by the recession following the tech crash. The resulting volatility inspired a sell-off. Crude oil movements in 2014-2015 are supply related with long-term volatility and stable short term directions (except as of September). Another difference may further insight into the relationship between equities and commodities prices. The onset of inflationary or deflationary environments can change how the two securities are correlated. In inflationary settings, commodities and stocks move together reacting to an increase in exports and a strong economy. Deflationary environments cause stocks and commodities to move against each other as they react to currency strength differently. In 2001, investors are going to be trading in an inflationary period so when stocks are dipping so are crude oil futures. The economy we are trading in now is almost deflationary causing a relationship to fizzle. Investors have seen with the stronger dollar, commodities are hurt but stocks are encouraged by the possibility of a stronger economy. In the comparison between the tech stock bubble of 2001 and the recent bubble in 2015, we have been able to tease out some factors that can be identified through the similarities and differences of the two periods. It is apparent that a short term loss in commodities is the result of any speculative bubble popping, but the formation of a stock bubble does not dictate commodity movement (or at least WTI crude oil movement). Instead, attention should be paid to the macroeconomic condition of inflationary and deflationary pressures as well as unique fundamental atmospheres. For now, we can conclude that the effects of the correction on WTI are over, and supply fundamentals as well as deflationary pressures will define the future movement of the most watched energy commodity.