Read more from our friends at Wired
As Americans place a record amount of bets into a stock market that continues to rise towards the heavens, few realize how much the Dow Jones Index is overvalued. While some metrics suggest that the Dow Jones Index is very expensive, there is another indicator that shows just how much of a bubble the market has become.
If we compare the Dow Jones Index to the price of oil, we can see how much the market has to fall to get back to a more realistic valuation. For example, if the Dow Jones Index were to decline to the same ratio to oil back to its low in early 2009, it would need to lose 14,500 points or 65% of its value.
To get an idea just how overvalued the Dow Jones is compared to the price of oil, look at the chart below:
The oil price (BLACK line) increased with the Dow Jones Index (BROWN area) until it peaked and declined in 2008. Even though the oil price line overshot the Dow Jones by a wide margin in 2008, after it corrected and moved higher in 2010, both the Dow Jones and oil price moved up in tandem.
If you look at the movement in the oil price and Dow Jones Index from its low at the end of 2008 to 2013, you will see just how similar the two lines moved up and down together. While the oil price shot up higher than the Dow Jones during the peaks (2010-2013), they paralleled each other quite strongly.
THE BIG DISCONNECT: Dow Jones Index & The Oil Price
However, the BIG disconnect between the Dow Jones and the oil price took place