What’s the market talking about?
If the market trades on fundamentals it must be setting land speed records for metamorphosis: from the Goldilocks Butterfly to the Credit Caterpillar crawling over speculative psychology. Do things change so much overnight to cause a 360-point drop in the DJIA based on Exxon Mobil earnings and a Citigroug downgrade? Was Thursday’s shakedown the lost third “Cha” in the FOMC Cha-Cha-Cha Pattern?
Typically volatility after an FOMC announcement- there are usually three distinct moves of increasing amplitude in opposite directions from the preceding swing, with the third move giving the genuine directional bias. Wednesday the market sold off initially after the Fed ease. Then, stocks rallied strongly while Thursday’s decline eclipsed Wednesday’s swings entirely.
Was Thursday’s sell-off related to fiscal year end for many mutual funds that could “legally”? Was Thursday just another shakeout like we saw on October 19?
The difficulty in any particular situation is knowing whether or not news and fundamentals have been baked into the cake – whether good news will be bought or sold – whether the buy the rumor and sell the fact trade will rule the day; or whether the momentum freaks and quant cowboys will drive good news even higher, or bad news even lower.
Just as volatility is a gift from the gods for traders to pay the rent, momentum is a beautiful thing for a trader. Almost as beautiful as is hindsight. In hindsight, almost everything about the prior session seems so crystal clear.
It seems crystal clear to me that the market is evincing a sea change. With the Fed having pulled the net of last resort for the time being, and Ben having put the put back in his hip pocket, we need to be very precise about grabbing the trapeze when it comes to buying into downswings. Why? Because for the near future at least, good news will be good and bad news will be bad. The bulls may not charge in so ferociously to scoop up the babies thrown out with the bathwater, or to catch falling daggers between their teeth. The action recently in some of the glamors may be telegraphing this change in character.
Tales of the future.mp3.http://videocalibration.com/soundsnew/user%20controls/Tales%20Of%20The%20Future.mp3
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Oil is up 8% just in the few weeks since the Federal Reserve slashed interest rates to help stem the credit crisis, in the process igniting one of the strongest commodities rallies in years as the prospects of a higher inflation rate suddenly improved. For those of us who thought the speculative money had long left the energy sector, this has been a stunning new leg of the multi-year rally.
Almost on cue Wednesday morning as oil hit $89, equity investors finally woke up and dumped shares, turning a nice Nasdaq-led surge in early trading into a 100-point decline on the Dow Jones average by mid-afternoon. Then, as oil backed off, stocks began rising again.
The rally has happened fast enough that the higher prices haven't yet really filtered through to higher gasoline prices, though experts think this could happen in a matter of weeks, if not days.
The higher prices also haven't been factored into corporate earnings, particularly the consumers of oil and gasoline, such as the airlines. Once the market starts taking this into account, the dismal performance we've seen in the past few days since earnings season began can only get worse.
Yet still, despite falling house prices, soaring energy prices, a credit crisis hitting the financial sector, and increasing concern about more violence in the Middle East, the amazingly resilient American consumer continues to pack malls, restaurants, highways, popular air routes, concerts, and sporting events, as if the bill for all these hijinks will never come due.
As oil rose over the past several years to $20 a barrel, $30, $40, $50, etc., one of the popular games among market experts was to predict what point the price would need to get to for consumers to really sit up and take notice. Many thought $80 a barrel would be it. Now that we're above that, it's clear it will be something above $100.
In inflation-adjusted terms, the all-time high of oil prices, reached during the first oil crisis in the early 1970s, was somewhere around $106 to $108 a barrel. That's just about where Goldman sees oil going. What that translates to in terms of gasoline prices, I don't know. But many economists think $4-a-gallon gasoline will be the turning point.
Last time I filled up at the pump, we weren't there yet. But it was painful enough already. With the falling value of the U.S. dollar exaggerating the rise in dollar-priced oil, it's clear there could be a ways to go in this super-spike. And it could happen pretty quickly. Who would have thought we'd ever long for the days of $50-a-barrel oil?
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