The market’s long flirtation with range bound trading ended last week when the indices broke through the bottom limit of their ranges. From December 2003 to August 2004, the bottom for each major index were 9900 on the Dow, 1887 on the Nasdaq, and 1080 on the SPX.
All three indices broke support lines last week, and the reasons are not hard to discern:
Oil had initially run up, along with other commodities, due to very strong demand from China, particularly over the past 2 years. Add to that the premium built in anticipating terrorism, along with tight refinery capacity. The Yukos situation in Russia has merely been a flashpoint for an already constrained supply demand balance. However, Oil is starting to look “toppy.” (see nearby chart).
Terror Fears are exhausting the public investor; The most recent upgrade of the terror alert status in NY and Washington D.C. is reminiscent of the pre-war period prior to March 2003. Investors have stepped to the sidelines until the situation resolves itself after the November 2nd.
Weakening Economy: GDP and Employment continues to show signs of slowing dramatically; The most recent data suggests that job creation never really got into high gear. While we have repeatedly acknowledged that this cycle is atypical, it would be unprecedented for the most recent strong move off of the economic lows to fade so totally without any organic, non-stimulus growth.
Federal Reserve: while it seems to be a foregone conclusion that the Fed will go another ¼ point tomorrow, the subsequent meetings on 2004 have been put into doubt. That is a further sign of the market’s fear fo a slowing economy.
You will note that the U.S. elections are not included, as a I do not believe they are a significant factor impacting the markets. (Indeed, the reverse is more likely to be the case.) This is an admittedly minority viewpoint.
The question for the rest of 2004 is whether the indices can snapback into this prior trading range, or whether they will fail at the new resistance levels (prior support is now resistance) of 9,900 Dow, 1,887 Nasdaq, and 1,080 SPX.
The keys to progress for the second half are simple: oil must ease back down, and economic reports need to strengthen. Terrorism will resolve of its own accord via the calendar.
Oil is beginning to get really interesting lately. I have the feeling the major media *may* just pick up on the Peak Oil theory, its getting darn easy to tumble into. I’m not sure if oil speculators are aware of Peak Oil yet but it would not suprise me if they were. I just hope they don’t end up giving those awful fringe groups like the die-off nuts a voice when it happens. Really anything could happen with Oil right now to throw it way past $50, just one bombing of a Saudia oil infrastructure and its all over with. I’d love to hear Barry’s view of Matthew Simmons current outlook on Saudia Arabia’s Ghawar reservoir. Also wait for the news when it comes out that the House of Saud’s *extra* oil they have been adding to the market is all Heavy Crude and not that tasty Sweet Light Crude that you make things like gasoline and diesel with. I’m employed by a large trucking company so I watch this with a bit of apprehension. While were at it let’s add in a little El Nino announcement this week and watch how the Natural Gas market behaves this winter under some crazy weather.
Dennis, I couldn’t tell if you buy the Peak Oil theory, or if you were being dismissive of it. I’ve read a lot of books on the topic and have gone through tons of publicly available information and my conclusion is that we are indeed getting very close. The current action is probably related more to Iraqi pipeline blasts, House of Saud fears, Venezuela election, Norwegian strikes, etc. But even if that clears, the trend is still up, due to Peak Oil.
If there was a lot of low hanging fruit (oil) to be found, the majors would spend on exploration. Rather, they are busy buying back their shares.
Listen to the folks at ASPO (www.peakoil.net), Simmons, etc. Oh, did you see the drubbing that T Boone Pickens gave to Kudlow and Cramer today? Set them straight on energy…
I also have an archive of articles on Peak Oil:
http://www.furl.net/search?enc=UTF-8&search=browse&id=michaelrunge&sort=&dir=&pos=&category=117395&date=0&keyword=
Sorry if the URL is malformed and difficult to cut and paste, I hope the info is helpful.
[BLR: I discovered FURL this weekend, and its pretty cool — nice find Mike]
Don’t forget the fact that Bush might get re-elected, might attack some other sovereign nation, and so on. Bush has devastated foreign relations in just four years and isolated the US from many traditional allies. The US can’t afford 4 more years of Bush and the markets know it.
Faisal Hoque
Don’t forget the fact that Bush might get re-elected, might attack some other sovereign nation, and so on. Bush has devastated foreign relations in just four years and isolated the US from many traditional allies. The US can’t afford 4 more years of Bush and the markets know it.
Faisal Hoque