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Oil's
Up, Stocks Are Down - Now What? |
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What
a difference a day makes. Friday's selloff turned what would have been
a tepid week into a fairly good-sized loser. Unemployment got the ball
rolling, and then speculation/hysteria kept it going.
 So
do we take this as a hint of things to come, or do we just chalk it up
to a day of bad luck and expect the bulls to take control again? That's
the question we'll address today.
First, a reality
check. The market rarely loses around 3% in a day. When it does
though, more often than not the indices stabilize and/or make a modest
rebound over the course of the next 2 to 4 days. Beyond that, there is
no statistically significant result. In other words, the odds don't favor
another massive pullback early this coming week.
That being said,
the technical outlook for the market is mixed. The Dow and the S&P
500 are now in a short-term bearish mode, while the NASDAQ and the Russell
2000 are still in an uptrend. One could argue that large caps rule, but
given the NASDAQ typically leads the market (both up and down), we're not
counting the bulls out just yet.
From a sentiment
perspective,
the scenario is also leaning slightly on the bullish side of the fence....in
a contrarian way. The CBOE Volatility Index (or VIX) made one of its biggest
one-day gains in a while on Friday. While a VIX that's trending
higher tends to be bearish, when the VIX explodes
higher, it's frequently
at a short-term bottom for stocks.
The only flaw
with the VIX's potential peak this time around is that it occurred at such
low levels - it closed at 23.65. All the other prior significant peaks
have occurred above 30. So, this peak in fear may not be enough fear on
an absolute level to be a mini-capitulation.
 What
about oil? Great question. Take a look at the chart, and you be the
judge. Fundamentally, the demand/supply dynamic is tight, but it's nowhere
near
justifying the 10 point move to $138 per barrel. Yet, there it sits...a
new record.
Normally we'd
be inclined to warn you this was speculative buying. However, it's been
speculative buying that's been driving it up for months, and it hasn't
been snapped (in a meaningful way) once. As long as fear is driving
the price - and analysts keep predicting $150 oil - who's to say
ridiculous prices can't get even more ridiculous?
On the other
hand, all investors have a common sense threshold of some sort that gives
us the ability to say 'enough is enough'.
The editorial
staff of the Micro Cap Press suspects Friday's surge in oil prices was
an over-reaction to, among other things, unemployment rates. With
unemployment racing, the market may have been quietly thinking the Fed's
going to end up lowering rates despite Bernanke saying just a few days
ago they wouldn't do so. Lower rates mean greater inflation...and commodities
like oil see price gains in an inflationary environment.
Just so you
know the whole story, unemployment skyrocketed to 5.5% last month...the
highest reading since 2004, and the biggest single-month move in more than
two decades.
 We've
been following
the unemployment trend since the middle of last year, concerned that
a continued rise in joblessness would eventually accompany weakness in
the capital markets. Stocks finally paid a toll beginning in December,
but based on the trend we see (see the nearby unemployment chart), we now
have to wonder if the market needs to sell off a little more to really
reach a good bottom.
Considering
everything we've just looked at, our overall take is bi-directional, depending
on your timeframe.
In the very
short run - as in days - we're expecting stocks to bounce after
such a harsh end to the week (and the spike in fear). That bounce may or
may not be enough to pull the market out of its rut though. Only if all
the
indices move to new highs do we think bullishness will be sustained for
a few weeks to months.
Either way,
we're eventually looking for one last good selloff before saying the slate's
been cleaned for the next bull market. That bearish leg may start in a
week or two, or perhaps a month or two. It doesn't matter; we just haven't
seen enough price deflation yet to burn off all the excess.
Of course, what
the market's doing trumps all forecasts of what it should be
doing, so our outlook is subject to change. Be sure to stay tuned to the
newsletter - we'll update our thoughts as needed.
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The
'Best Of' Our Clean Energy Discussions |
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Thanks for all
the great feedback regarding last
week's look at electric cars and solar/wind energy. We've tried to
answer as many questions as possible, and where it made sense, we posted
your ideas and thoughts in the blog. If you were interested in the topic
at the time, you'll also be interested in these blog entries:
As before, you
can leave thoughts and messages at the bottom of each individual entry.
We'll continue
to cover the topic because it's important to you as well as the environment.
If you have comments or other ideas you'd like to share - with us or with
the rest of our readers - please feel free to send 'em in.
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Updated: 3:10 pm PST (23:10 GMT), November 20, 2008
