NASDAQ FALLS UNDER DECEMBER LOW -- COMPARISON OF OIL AND OIL STOCKS DURING 1990
LAST MAJOR INDEX TO FALL... A lot is being made in the media about the Dow falling back under 8,000 today. Since the Dow had already broken down last week (along with most of the NYSE averages), we think the bigger news involves the Nasdaq market. The Nasdaq Composite fell beneath its December low today. That makes it the last of the major stock indexes to do so. Today was one of those days when virtually everything was down. That includes all market sectors and groups -- including gold and oil. Bonds were also down. A bad day all around. While everything fell, some group indexes suffered more serious technical damage than others.
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BANKS, CYCLICALS, AND DRUGS FALL HARD... The following group indexes show how widespread the recent stock market selloff has been. All of the indexes shown below are breaking some kind of chart support. The banks, cyclicals, pharmaceuticals, and semiconductors have all broken their December lows. Of the Dow averages, the utilities were the only one that hadn't broken down -- until today. The Dow Utilities fell under its 50-day average today. That puts all three Dow averages -- the industrials, the transports, and the utilities -- in downtrends.
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OIL INDEX HITS NEW LOW... Oil prices fell almost a dollar today. However, it's uptrend is still intact. By contrast, the AMEX Oil Index (XOI) fell to a three-year low. That's seems a little unusual. Although oil stocks have been falling for the past year, the real question is how they did relative to the overall market. The relative strength line (vs. the S&P 500) actually rose into October -- when it peaked. That means the oil stocks actually held up pretty well until October. They've been underperforming since then. We thought we'd look back to see how oil stocks did compared to oil during the Persian oil crisis during late 1990 and early 1991.
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OIL VS. XOI DURING 1990... The charts of oil and the XOI show more similarity during 1990. The price of oil surged in early August when Iraq invaded Kuwait. Oil stocks actually turned up a couple of months before oil, but only started to outperform as oil prices surged over the summer (see rising relative strength line). Oil stocks also peaked a couple of months before oil did during that October. Both fell into January of 1991 when the Persian Gulf War started. Right after the war started in mid-January, oil fell while oil stocks rose (along with the rest of the market). The XOI, however, continued to underperform the market well into 1991. Notice that the rising relative strength (XOI vs. the S&P 500) peaked during October. It did the same thing last October. It seems that during 1990, oil stocks acted as a leading indicator for oil -- both on an absolute and a relative basis. (We happen to believe that relative performance is the more important of the two comparisons). It will be interesting to see if the current oil stocks' relative weakness is hinting at some easing of oil prices this time again.
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