Insights & Advice


After a sprint, markets need to consolidate gains

What a wonderful week for stocks! All three averages were up 6% or more since last Thursday’s successful retest of the lows. The last two days we have seen some consolidation but that’s a good thing.

Those who panicked last week and sold fearing the worst, are now sitting in cash, at least 6% poorer, and if their account is taxable, with a tax liability for the year. That is the result of making emotional decisions. Sure, seeing stocks fall back to their lows was scary. However, doesn’t it seem odd to you that the markets turned on a dime as the S&P 500 Index hit its lows (almost to the penny) made earlier in the year?

Some might say that smacks of market manipulation. Others, like myself, who think this entire correction is nothing more than an overdue technical exercise in profit-taking, would take advantage of these events by putting money into the markets. Remember, no one ever made money chasing stocks. It is buying when others fear to tread that real money is made.

Why do I think stocks are simply consolidating here rather than rolling over to decline even further? Well, one thing that gives me confidence is the lack of any technical resistance levels around here. Buying stocks on the S&P 500 Index sort of petered out around 1,925. There is nothing significant at that level. Real resistance is up around 1,960 and then 2,000. It would seem to me that markets have simply slowed down (after the best run of the year) to catch their breath. Pulling back to 1,900 (which it did on Friday) seems well within reason, if we are to go higher.

I suspect that if we give the averages another day or three to consolidate, there is a good chance we do climb higher. Of course, we also have to remember that the oil price continues to determine the fate of the stock markets, so let’s look at energy.

Here we see a similar consolidation process. Recall that oil bounced off the lows at around $26/bbl., after rumors of an impending meeting between the Saudis and Russia first hit the market tape. By the time the news that a proposal to freeze oil production at existing levels was confirmed, oil had risen to almost $37/bbl. Since then the price has dropped back to under $30/bbl. That too can be considered a normal pullback in a rising market.

The problem with oil is that calling the next move in this commodity is completely beyond anyone’s ability. Could OPEC and non-OPEC nations come to an agreement over the weekend? Could Iran come out with a statement that could kill the whole idea? Anything is possible. The best that can be said is that energy producers are now at least talking about some kind of accommodation. That is light years ahead of where we were two weeks ago.

What I will be looking for next week is the oil price to hold somewhere above $27/bbl. or higher. That would give me a great deal more confidence in predicting the direction of the stock markets. If you put a gun to my head, I would bet on oil holding that support, at least until something further is revealed on the OPEC front. If oil were to breach $38/bbl. then we would truly be off to the races.

In the meantime, the most recent investment sentiment numbers are bouncing from bearish to bullish and back again indicating that investors have no clue what is going on. That comes as no surprise when markets are held hostage by a commodity such as oil. Hang in there, readers, better days are coming.

Posted in A Few Dollars More, At the Market