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Oil had its biggest pullback in 17 years in dollar terms, according to the Associated Press, as concerns about the U.S. economy knocked the price of a barrel of crude down $6.44 to $138.74. Oil had been down as much as $10 earlier in the day.
But while the sell-off of oil helped the stock market crawl back from its scary lows of the day, it wasn't exactly a signal the bear is over. The Dow Jones industrial average ended down 92.65 points at 10,962.54, an improvement from its 227-point deficit earlier, but not enough to curb the market's downtrend. The Dow closed below 11,0000 for the first time in nearly two years. It's 22.6% below its 2008 closing high and down 17.4% this year.
Investors are hoping a break in oil prices could be that one glimmer of hope that drowns out the bad news from everything from the credit crunch to the housing bust. "It's oil that got us" in a bear market, says James Paulsen of Wells Capital Management. "Oil is the thing that changed everything. If you can take that back out, this gets better in a hurry."
But investors remain torn on whether any relief in oil prices is enough to tame the bear market. Two camps are forming that believe:
•Lower oil prices are the impetus to get investors to buy stocks again. Investors are using the price of a barrel of oil as a proxy for inflation, says Steve Sachs, director of trading for Rydex. So lower oil prices would be a comforting sign. "A substantial drop in the price of oil will be more than enough to get equity markets off their lows and headed up," he says.
Paulsen says higher oil prices have fueled concerns about consumer spending, then in turn housing and then in turn financials and the dollar. If oil prices fall, that breaks the cycle, he says.
•Oil declines aren't enough to counteract bigger problems facing stocks. Despite the big decline in oil Tuesday, it's just a blip in what's been a big move, says Oliver Wiener, trader at BTIG. The price of a barrel of oil, even after Tuesday's sell-off, is up 44.6% this year. And the futures market indicates traders expect higher prices six to nine months from now.
More important than oil are regulators' efforts to help the economy's bigger woes such as the moves to bail out beleaguered mortgage companies, he says. That's why investors shouldn't assume stocks will rise even if oil continues to fall, he says. "There's no single correlation here," he says. "It's not crude down, stocks up."
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