Market volatility continued this week as the averages moved up and down in trend- less, light summer volume. Yet all three averages managed to finish on the plus side for the week as the continued fall in oil prices supported the market. This was even more impressive given the continuing stream of bad economic news and the on-going crisis in the financial sector. Here are just some of the tidbits that hit the wires over the last few days.
Fannie Mae and Freddie Mac, the mortgage giants whose stocks doubled in price two weeks ago on government bail outs announced losses three times the amount analysts were expecting in the second quarter. The auto companies are petitioning lawmakers to loan them upwards of $50 billion just to stay in business. Both Merrill Lynch and Citigroup agreed to buy back $17 billion in auction-rate securities they sold retail investors over the last year and most retailers reported disappointing earnings signaling that the government’s much-vaunted stimulus package had only a fleeting impact on the economy.
On the bright side, oil continued its decline, (although not in a straight line) finishing the week under $115/bbl. level which is down 8% for the week of which half of that decline happened in just one day, Friday. Oil is now down over $32 from its high of $147 in mid-July. Gas prices have also dropped during the same time period (now under $4/gal.). All week as oil prices swung up and down several dollars a day the markets played the wagging tail to oil’s dirty dog: oil up, stocks down, oil down, stocks up. Every so often a bit of bad news on the banking sector would add additional emphasis to this ping pong game. We have had several days in a row of 1-2% swings. By the close on Friday all the averages were up over 2% on the day and for the week the Dow gained 3.6%, the NASDAQ, 4.5% and the S&P 2.9%. While I believe the markets will move higher for a bit longer (S&P 500 could reach 1325), I fear this bear market bounce will not have a happy ending.
On the commodity side, everything from fertilizer to gold to corn have plummeted with the price of oil. I caution readers not to move back into this sector. I’ve actually reduced my target range on oil to $88-90/bbl. from the mid $100s and lowered my price targets for all other commodities. I believe that when this area does bottom out it may take several months before we see the next leg upward. It could take until sometime in 2009 before commodities are ready to once again resume their rise.
The question I ask myself is what happens to the stock market when oil does bottom. Granted a decline in oil will have a beneficial impact on the economy but the market is busily discounting that development as you read this. Once traders are through jacking up the market we will still be left with the banking problems, the housing problems, a weak economy and who knows what else.
My advice: enjoy the ride but sell into this bounce as the markets climb higher. I suspect the averages will roll over fairly soon and seek to re-test the bottom once again leaving the unwary investors with a further loss of 10-11%. As a born optimist, I am hoping the S&P 500 will hold 1180 on the downside. I’ll stick with that for the time being.