The stock market is finally showing signs that a decent price correction may be under way. Of course, the news of the day continues to be the oil saga. Today, the "black gold" closed at $67.40/bbl as fears of Tropical Storm Katrina entering the Gulf of Mexico drove prices higher. The DJIA fell 85 points today to close at 10,434.
Today, Morgan Stanley increased their price targets for COP (PT-$72), MRO (PT-$68), XOM (PT-$72), CVX (PT-$70), and SUN (PT-$70). They also resuming coverage of CVX with an Equal-weight rating and $70 price target.
In a research note, Morgan Stanley said that the Integrated Oils and Refining stocks appear to be 15% undervalued based on mid-cycle returns. Refining continues to be a huge problem, and the company increased their projections for refining margins for Q3 2005, and FY 2005.
There is a situation looming that could temporarily bring the price of crude back down to the $60 level.
The Strategic Petroleum Reserve appears to now be filled to the 700 million barrel capacity. When the President announces he is satisfied with the amount of oil in the Strategic Reserve, the price of oil could correct to the $60 level.
This news, when it comes, could begin the rally that will mark the highs for 2005, and possibly 2006. I feel that the market finale could carry the S&P to the 1300-1350 level, the DJIA to 10,800-11,000, and the NASDAQ to the 2400 mark. At this point we will be looking to be shorter than a midget at Hulk Hogan's birthday party.
The other news of the day was the celebration among the homebuilding stocks. New-home sales rose to a record high in July, this comes on the heals of yesterday's news of a decline in existing home sales. If new homes are selling, and existing home sales are declining, one could assume the following:
1) A lot a second homes are being purchased (or)
2) Investors are speculating on new contruction (and)
3) The inventory of homes will be larger than the number of buyers.
I have been looking for a rally in the homebuilding sector. If we can get close to the highs for the year, we will initiate some short positions for the IA portfolio.
Finally, the Commerce Department reported that durable-goods orders fell by 5.7 percent, the largest drop since January 2004. Durable-goods represent big-ticket items that have a useful life of more than three years (IE- Appliances). This drop in orders may be a signal that consumers are beginning to feel the pinch of higher energy costs.
