Last week, on the basis of one disappointing auction, Sotheby’s stock lost a third of its value — even as the company reported the best three consecutive financial quarters in its long history. In an analyst call for the company’s third quarter earnings, CEO William Ruprecht pointed out that Sotheby’s had already taken the $14.6 million loss on guarantees for the Wednesday evening sale. Despite those losses, he underscored that the sale was otherwise profitable.

Nonetheless, $1.3 billion of the company’s value has disappeared. That’s because Sotheby’s is the only publicly traded auction house. Its stock is a proxy for the entire art market. Despite evidence that the art market is larger, deeper, and more independent from other financial markets than ever before, if the art market sneezes, Sotheby’s stock catches the flu. Oddly, in this case, there is no evidence yet of a significant slowdown in the art market. Even in a disappointing sale, 35% of the lots that sold at Sotheby’s went for prices above the high estimate.

Last week was not the first time that BID — Sotheby’s cute ticker symbol — suffered. It spiked first in 1989, at the peak of the last art boom, before tumbling down a cliff in the art crash of 1990. It spiked again in 1999 before a long, slow decline exacerbated by the price-fixing scandal. Early in 2006, the stock started to show some life. Eight years into a booming art market, the company was growing with the art world. For the first time since 2001, the stock moved above $20. It opened this year in the low $30 range — where it is now — and climbed through a successful year of sales to the low $50 range. Then the credit crisis hit in August, whacking the stock back to $39. Just as quickly, the stock recovered, as credit fears receded and the stock rose to its highest level just before the London auctions were held to coincide with the Frieze art fair in mid-October.

Those sales were successful, but the vertiginous ascent of art prices seemed to have leveled off. The art market’s greatest problem is keeping up with expectations, which couldn’t be higher: The art market has been on an extraordinary run. According to Artnet, since 1998 the number of lots sold at auction around the world has increased by more than 50%. At the same time, the value of that art sold has more than tripled.

In the last two years the pace has increased. For the 12 months ending in June 2006, $5.9 billion worth of art was auctioned off in 144,000 lots. But those spectacular figures pale next to the numbers for the 12 months ending in June 2007. During that period, $9 billion worth of art sold at auction in 165,000 lots. That’s a 52% increase in value with only a 14% rise in volume. Perhaps there was no way for Sotheby’s stock price — and the art market — to keep up with that pace. But the question is: Are we in for a crash — and how much of the art market is dependent on confidence in other financial markets?

The art market is bigger than Sotheby’s, of course; it’s much bigger than both of the auction houses. Auctions account for between 20% and 25% of the total art market, Artnet estimates. That makes for a conservative value of the art market in the range of $36 billion. That dwarfs the online advertising market, which is the engine of stock market darling Google and its competitor Yahoo. Together, both companies generated sales this year of only $25 billion.