Happy December 26th to you Slope. As we begin to close the book on 2024 and look forward towards 2025, I thought it was a good time to look back at my primary call for 2024. This year I was focused on Tom McClellan’s 10-year crude oil analog, and what it was forecasting for the 2024-2026 time period. Let’s take a look.
You can read Tom discussing the analog here, just after the 2020 Covid crash. In the article he states:
“I first discovered this relationship back in 2008, when I looked at a log-scaled long-term chart of crude oil prices and noticed that it looked an awful lot like the chart of the DJIA. So, I put the two on a chart together but was not really satisfied with the way that the pattern details lined up. After some tinkering, I found that offsetting the crude oil plot forward by 10 years made for a much better fit between the two plots.
That was a profound discovery, because it means that the dance steps seen in crude oil’s price plot show up again 10 years later in the stock market. I do not view this as necessarily being a cause-effect relationship. Rather, I view crude oil as the messenger who gets word first about what is coming later for stocks.”
The chart above is crude oil from 2014-2015. The decline that crude oil is currently forecasting for the broader market can be seen in crude oil’s price action from June 2014 through the beginning of 2016. This is the decline that I am looking to be echoed in the broader market. The box I have highlighted in red in the chart above shows how crude oil acted from June 2014 through the end of 2014. The past six months that we have just lived through in SPY have been the echo of this time period. As you are having probably already gathered, we haven’t seen this decline yet.
The chart above is SPY for the past year. The small red box in the bottom left is last year’s failed Santa Clause rally. SPY saw a brief decline in July/August of this year but afterwards reasserted the bullish uptrend and went on to make new highs. The rally in the broader market over the past five months flew in the face of crude oil’s forecasted decline.
This scenario is not without precedent. I will point us back to the original setup where Tom McClellan first noticed the analog. The 2007-2009 bear market. For this time period, let’s look back at how crude oil was acting ten years prior to this period. Below is the chart of crude oil from 1997-1999. As you can see crude oil topped in January of 1997, had a nasty bear market, and then bottomed in December of 1998. This bottom along with the subsequent higher low in February 1999 gave a good leading indicator of the approaching major bottom in SPY during March of 2009. But what about the top?
The crude oil analog was forecasting a top for the broader market around January of 2007. The ultimate top to SPY came in October of 2007, nine months later. Afterwards, SPY went on to fulfill the bear market that crude oil was forecasting. Crude oil’s leading indicator for a bottom in hindsight was another opportunity to understand and anticipate the March 2009 SPY bottom. The lesson I continue to take away from the crude oil analog is that the analog doesn’t always matter immediately, but over 100 plus years it has an excellent track record of mattering… eventually. I expect a similar outcome in our current instance.
As we approach the end of the year, I for one am ready to close the book on 2024. Turning the page to 2025, and something new. I’ll agree with Mellencamp.
