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Stop Blaming Oil!

Better late than never: The market’s overbought condition finally reached the point last week where the buyers became exhausted, leaving the sellers to dominate trading. While a lot of commentators foisted blame on Oil, as well as Interest Rates or even Iraq, we find those rationales singularly unsatisfying: Oil has been flirting with $60 for weeks, Interest rates have been going up for a year, while Iraq has been messy for even longer. Pat explanations for the markets’ daily gyrations rarely ring true to us.

As we noted last week, Mutual funds were running with bearishly low levels of cash on hand. That’s often the fuel of sustained moves higher, and when they run out of gas, so too the market. But as we also noted, hedge fund cash is (anecdotally) at relatively high levels, buttressing our expectations that the consolidation lower remains well contained.

The issue for resolving this retracement may have more to do with time than price. After the fast move off of the April lows, the indices quickly got overbought, but never backfilled. All the while, Bullish sentiment quickly rebounded; With the benefit of hindsight, we can see sentiment went too far too fast. That combination of Bullish complacency and a technically extended market condition is what led to the selling - not Oil, Rates or Iraq.

Indeed, since October 2002, Oil has doubled, and with it the Nasdaq. The inverse correlation many seem so found of blaming the Market’s woes upon seems to come and go with such irregularity that we hardly find it instructive to quote Oil as the basis for the selling.

“Imagine,” we were recently asked “where the Nasdaq would be if Oil were still at $25 a barrel.” Our answer is “probably a lot lower.” Why? Many of the same factors that have driven Oil higher have also been driving the Nasdaq upwards: Massive government stimulation, ultra-low interest rates, and increasing Globalization.

At the present juncture, we expect not so much more downside price-wise as we do a period of consolidation, as mutual funds refill their coffers with fresh ammo. Before the sell off began, Nasdaq was way above its 50 day ma; now, its only 25 points off.

We wouldn’t be surprised to see the next equity bottom formed as Oil moves towards $65. Such a peak could correspond with a low in equities, and fit in nicely with our Bear Trap theme. Watch that price, as well as the tech index’ support between its breakout point and its moving average (2000-18) for a good risk/reward entry long point.

Monday, June 27, 2005 | 03:05 PM | Permalink | Comments (8) | TrackBack (2)
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Comments

Blame Rumsfield since the market really tanked when he made the first officail pronouncement that the US could be in Iraq for up to 12 years.

Then blame Grokster.

Posted by: zgveritas | Jun 27, 2005 3:39:31 PM