You have to admit, trying to figure out the market's intermediate and longer term moves is like a lot like playing a game of chess. As far as the markets short term swings are concerned, that is like trying to hold a conversation with a drunk. It is the short term swings however, that make longer term investors second guess their strategies.
Today's $4 move up in oil looks very suspect to me (but I'll take it). Traders are paranoid since Katrina, and feel that tropical storm Rita will wipe out what is left of the Gulf Coasts oil complex. In reality, no one knows what Rita will do once it hits the Gulf, but anything is possible.
When I went for my noon time jog today, it was a blistering 95 degrees, and the Gulf of Mexico has got to be a virtual sauna by now. Obviously, the boiling waters will intensify Rita once it hits the Gulf.
The IA energy stocks went nuts on the news of Rita, but stopped short of their highs for the day (Exxon-XOM $64.63, +.93/ Chevron-CVX $64.31, +.93/ Schlumberger-SLB $85.37, +2.21/ Chesapeake Energy-CHK $35.77, +1.91). If it had not been for the news of Rita, it looked as if the oil complex was in the beginning stages of a pullback.
Wall Street is famous for sucking investors in just before they decide to take profits. Of course, we are not in as traders, we have a slightly longer time horizon. Be that as it may, we will experience short term price corrections simply because extraordinarily bullish sentiment often gives way to profit taking.
Hurricane Katrina caused a supply shock in oil, and the shock was met with an immediate release of oil from the Strategic Petroleum Reserves. Before the news of Rita, oil prices were down from the peak of $70/bbl to $63. I feel if Rita had not been factored into the equation, oil prices would have continued to correct.
Another factor leading to last weeks sell off in oil were the signs of an economic slowdown. Obviously, a slowdown in the economy reduces the demand for energy.
Lastly, the "is he or isn't he" scenario will come into play. Of course I am taking about the great OZ of the Federal Reserve. You know by now (after reading this journal) that oil is priced in dollars. If Alan Greenspan raises rates and continues to do so, the dollar remains firm and oil prices will hold steady or fall. If Greenspan pauses, then the dollar drops, and oil prices go up.
So, this week our plate is full with "what ifs". We will have to wait for Greenspan's decision on the direction of interest rates, and also see how much Rita likes her hot tub.
