After this week you should have either an upset stomach, stress headache or both. Human beings do not do well in markets that climb up and down by over a percent on a daily basis. Unfortunately, as this market bottoms, we may expect more of the same.
On the plus side the Greek Prime Minister George Papandreou received a parliamentary vote of confidence this week. Yet, facing investors this week is a vote on the passage of the austerity plan that the European Community demands in exchange for bail out money.
Economic data continues to disappoint with the latest unemployment figures coming in more than expected. Wherever you look, gloom and doom pervades the minds and hearts of investors. On Wednesday, Fed chief Ben Bernanke didn’t help by reducing the Fed’s estimate for GDP growth in the second quarter from 3.1-3.3% to 2.7-2.9%. Even a 5% decline in oil was viewed as negative and simply another proof that the economy is faltering.
Most investors missed the point of yesterday’s release of 60 million barrels of crude from the world’s strategic oil supply. Pundits complained that it was too little to impact demand since it amounted to less than a day’s supply of global demand. Others argued it was an act of desperation by an administration that has run out of ideas to stimulate the economy.
It was none of the above, in my opinion. Readers may recall that a few weeks ago prices of most commodities peaked after the CME raised margin requirements for everything from energy to silver. Speculators, who had bid commodity prices up to astronomical levels, abandoned the market in droves causing prices to decline to their present levels.
Most energy experts believe that the fundamental price where supply and demand for oil are in balance is closer to $85/BBL. But notice oil, until this week it was still trading at $100/BBL and above, (although down from its recent peak of $112/BBL.). Clearly, there were still a lot of speculators in the market, who could go either way. It was a tipping point where there was at least a 50/50 chance that traders might try and take the price higher once more.
To me, the International Energy Agency (IEA) exhibited perfect timing. With a relatively small amount of released oil, they managed to drop the price of crude by $5/BBL and send the speculators running for the hills. It has also added another element of risk since nervous traders will now have to be looking over their shoulder in case the IEA does it again.
As for the wall of worries that beset the market, all this pessimism is part of the normal process one expects as the averages descend to a level where buyers once again appear. Today we are probably within 1-2% of that area, if we are not already there. To me, the math is simple: a possible 50 point decline in the weeks ahead on the S&P 500 Index versus 150-200 points of upside. The risk/reward ratio tells me to not only hold the course but to buy on weakness.