Has the Commodity Bubble Popped?

To some investors it may already feel like something popped: The price of oil has fallen about 13% from its record high on July 11 to $127.50 a barrel. Some of the hot commodity stocks, such as coal miner Massey Energy Co. and fertilizer maker Mosaic Co., are down more than 20% in a matter of weeks, yet the former still trades at multiples comparable to Google’s.

The stocks have experienced a greater decline that traders in the space have become accustomed to, and the biggest percentage drop for oil since the summer of 2006. The latest rally in oil and gas, which began in February, has officially broken down.

Still, oil would have to fall another 20% to threaten its multiyear upward trend, according to one technical analyst. To rank with some of the great speculative crashes of history – Dutch tulips, say, or tech stocks in the early part of this decade, the commodities selloff would be just getting started. Proponents of the commodities trade say there are fundamental supply-and-demand factors underpinning the dizzying runups. Then again, so did defendants of the tech bubble.

After its peak in March 2000, the Standard & Poor’s 500 ground down slowly, taking until October 2002 to fall nearly 50% from the 1550s to about 800. The price of many commodities and commodities stocks — from gasoline to coal to fertilizer makers — rode up on the coattails of crude oil. So oil’s moves are pivotal. Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, said there’s good reason for a technician to believe oil’s retreat will continue in the near term.

“Since the peak, the down days have been on really heavy volume,” Detrick said. “The only day we had a bounce since the peak on July 11 was on July 21, and that was a very light volume day. You can almost make that statement for all commodities. There’s been a bounce here and there, but the selling without question has come on higher volume.”

The United States Oil Fund, an exchange-traded fund tied to the price of oil, recently traded near $103, off 39 cents. Mr. Detrick expects the fund to test the $100 level, where it bounced in June. Yet there are some ominous signs that the support won’t hold: The line tracing the 50-day moving average, which had been rising steadily since February, has now flattened out.