McClellan Chart In Focus: Crude Oil’s 10-Year Message. “..yet the long term message from crude oil prices says the stock market ought to continue trending upward into 2021” By Tom McClellan

Chart In Focus

We currently have trade wars, presidential tweets, inversions in the yield curve, slowing earnings growth, decreasing corporate share buy-backs, and all manner of other problems affecting the stock market.  And yet the long term message from crude oil prices says that the stock market ought to continue trending upward into 2021.

It is a fun attribute of crude oil prices that their movements give us a 10-year leading indication of what lies ahead for the stock market.  I discovered this phenomenon this a few years ago when taking a long term look at crude oil prices on their own.  I happened to notice that the long term pattern of crude oil prices looked an awful lot like that of the DJIA.  So I put them on a chart together, and the result was less than satisfying.  Sometimes they moved together, sometimes opposite, and sometimes there was no correlation at all.

It was only after I realized that crude oil’s movements were getting repeated in the DJIA with a delay that the clouds opened up and the sun shone in.  After some tinkering, I discovered that the lag time was approximately 10 years, which is the lag that is featured in this week’s chart. 

And this is not just a recent phenomenon.  This next chart shows this 10-year offset comparison going back to 1900 (the DJIA was created in 1896).  It reveals that the 10-year lag relationship has been working for the most part during the whole history of the DJIA.

crude oil prices lead stocks by 10 years

There are not a lot of chart phenomena and observations about which we can say that they have been “working” for more than 100 years, but this is one.  We may not be able to identify exactly why this relationship “works”, but after more than 100 years of a demonstrated relationship, at some point one stops asking the “why” question.  It has already proven itself, even if we may not know the “why”.

Crude oil prices reached a peak in April 2011.  Looking 10 years forward, that implies a peak for stock prices in April 2021, right after the Jan. 20, 2021 inauguration of whoever wins the next presidential election.  Crude oil’s path after that April 2011 peak was not a pleasant one for the bulls, and this implies that whoever wins the election in Nov. 2020 is going to face an ugly time for the stock market and thus for the economy.  And the big plunge in crude oil prices in 2014 (after OPEC gave up trying to control production of its members) means a big price drop for stocks in 2024, assuming that the relationship continues to work as it has for more than 100 years.  So whichever party wins the White House in 2020 is likely to lose it in 2024, as a bear market is a proven bad feature for a party trying to win reelection. 

For now, however, there is still an uptrend to ride toward the 10-year echo of oil’s April 2011 top due in 2021.  That trend won’t be in a straight line, but it should nevertheless be upward.  And it will be denied by the doubters all the way.  When the doubters finally jump on board the bandwagon in 2021, you’ll know that the time to step away has arrived.

Tom McClellan
Editor, The McClellan Market Report

Related Charts

Feb 23, 2017

Crude Oil Foretold the Trump Rally 10 Years Ago
May 15, 2014

Crude Oil Says DJIA Should Trend Higher
May 31, 2018

Waiting on the Echo of Crude Oil’s Big Drop


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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.