Tuesday, July 01, 2008

It Is A Bear Market: Now What?

It is official, early this afternoon the Dow was 20% below the October 2007 high. Now that we have the bear market rhetoric behind us, what can be expected going forward. One thing to keep in mind:
"Bear markets generally begin in good times. Bull markets generally begin in bad times."
The market did have a pretty successful bounce off of its low today. From a technical perspective the below chart of the S&P 500 Index shows the market remains in a solid downtrend; however, the bounce did occur on fairly good volume of about 4.8 billion shares. The MACD indicator at the bottom of the chart is not projecting a positive market upturn. If we could see a turn higher in the 12-day EMA this would certainly be a positive that could be added to today's market bounce.

(click on chart for larger image)

S&P 500 Index technical analysis July 1, 2008
The other factor weighing on the market is oil--no surprise there. Much has been made about the high price level of a barrel of oil. As the below chart indicates, the price of a barrel of oil has increased at a much greater rate than the price level of gas. Could this be a result of speculators in the oil markets?

(click on chart for larger image)

oil and gas chart Jul1 1, 2008Source: Daily Wealth

An interesting analysis of the speculative factor in oil prices is detailed in the article, Speculators Are to Blame for Sky-High Crude Oil Prices at the Contrarian Profits website. In a short excerpt from the article, the author notes:
...five years ago, the commodity futures market had $13 billion invested in it. Now it has $260 billion. Eighteen years ago, only 13 percent of open interest in oil futures was long (betting that oil prices would go up). Now, 58 percent is invested long.
If the stock market could get some relief from oil prices, the consumer situation would likely improve along with the equity markets and the economy.


Speculators Are to Blame for Sky-High Crude Oil Prices
Contrarian Profits
By: Andrew Gordon
July 1, 2008

The Real Numbers Behind High Gas Prices
Daily Wealth
By: Steve Sjuggerud
July, 2008

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