The Longest Downtrend in Crude Oil History is Over

“Dennis Gartman said Monday that crude oil wouldn’t trade back above $44 ‘in my lifetime.’” – January 25, 2016

The longest downtrend in history for Crude Oil is officially over. It began in late July 2014 when Oil first dipped below its 200-day moving average at a price of $98. Crude would not move back above that average until last week, 427 trading days later.

(For our new research on moving averages and volatility, click here).

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Crude would decline 59% during this epic downtrend, and 77% from its 2011 peak through the 2016 low of $26 (the largest bear market decline in its history). Since then, it has rallied over 66%, moving above $44 at the high today.

(Note: that level has no significance other than the quote above, which serves to illustrate once more the uselessness of specific time/price prophesies.)

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The decline in crude and other commodities along with the rising dollar had been wreaking havoc on credit markets and U.S. corporate earnings as I have chronicled over the past year.

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With this trend reversing over the past few months, credit markets have greatly improved and the hope is that U.S. corporate earnings will finally show an improvement as well. With the S&P 500 hitting new all-time highs this week, the market seems to be expecting this to occur.

As for Crude, everyone wants to know where it goes from here. I have no idea – nobody does – but following long downtrends with large declines in the past, Crude has tended to trade better over the next 6-12 months.

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What will this mean for the U.S. stock market? It’s anyone’s guess. As I wrote last year, there is a 0 correlation on average (since 1984) between the S&P 500 and Crude Oil. The notion that the S&P 500 needs higher Oil is patently false and we saw this first hand as the S&P 500 was up 10% during the worst Crude downtrend in history (see right column in first chart above).

That said, a stabilization or continued rally in Crude would likely be a welcoming sign for markets in general and credit markets in particular, especially if such a stabilization were to be attributed to an improvement in global growth. Such a scenario could also coincide with the long-awaited shift in equity leadership from the U.S. to International and Emerging Markets, which I’ve written about over the past few months.

As for the end of the epic downtrend, the following can be said:

1. The future is unpredictable (no one predicted the epic downtrend) and unlikely to look like the recent past (we saw this last year when the S&P 500 ended its own outlier period to the upside).
2. Don’t expect the same unrelenting downtrend over the next few years because this was truly an outlier period and such periods are by definition extremely rare. That doesn’t mean Crude can’t go lower, just that the path is unlikely to repeat.
3. Don’t bet your life on where Crude Oil is going and the impact it will have on the markets.