The Well, Duh! Comments for the Day:
1) Federal Reserve Vice Chairman Roger Ferguson indicated that higher energy costs will slow the economy.
2) Fed Chairman Greenspan said in a speech that "although the global economic expansion appears to have been on a reasonably firm path through the summer months, the recent surge in energy prices will undoubtedly be a drag from now on.''
I have to say it, Well, Duh! Oh, that feels so good. I do not claim to have all the answers, but I am amazed by the number of critics who have no answers.
I hate to be an I told you so type guy, but after reading the two comments above I couldnt resist. Besides telling you about the phantom inflation that no one said existed, I have also been warning investors about Real Estate for some time. In 2004, I warned investors at the World Money Show in Orlando about the coming energy crisis and higher interest rates.
I guess if the events you mention don't happen the next day, some people tend to cast doubt. So be it.
While Wall Street will probably bid up energy stocks one more time, I am beginning to realize that most investors do not want to ride down their energy stocks in 2006 as the economy weakens. I guess long term investing is a thing of the past. Thats okay. Investing in conjunction with the and the economic and market cycles is a smarter approach anyway.
We are all aware of the supply and demand issues facing the world, but sometimes taking profits, and standing aside while waiting for a substantial correction makes more sense. I think we have more room to run on the upside in energy shares before lightening up, so Ill be patient for the next few weeks.
Today's Market
Was today the turnaround that I told was coming? I think so. The market scared a lot of energy investors today, then in the afternoon, it turned on a dime and headed higher. The DJIA opened at 10,277, fell to 10,210, and then rallied 124 points to close up 1.2% on the day.
The NASDAQ rallied 35 points to 2091, and the S&P 500 had a great turnaround as it looked like the shorts went running for cover.
Looking Ahead
The big question now is will todays turnaround last. It looks as if hurricane Wilma will be heading toward the tip of Florida instead of toward the oil rigs in the gulf. If thats the case, another sell-off in oil could trigger an even bigger rally than we saw today.
You need to keep in mind that most and lock in profits during the month of October. In November, they begin to buy those positions back. There is a lot of gloom out there, and the sector rotation that we are witnessing is healthy for the market.
The market is trying to find a bottom, and just maybe they found one today. There are a lot of opinions about the market reverting back to its bear market phase. This is normal talk during the month of October.
Another reason for our optimism is the put/call ratio on the CBOT (who recently went public by the way under the ticker symbol BOT). Recently we have witnessed one of the highest levels of pessimism recorded over the past 10 years. When option traders pile on and out number the amount of puts versus calls by a wide margin, the market turns on a dime like it did today.
Since the October-November timeframe is usually associated with intermediate market bottoms, what we need is a lot of fear and an improving market. If today was in fact a short covering rally, these types of rallies can continue for quite some time. Once the short sellers have been rung out of the market, we will be looking to add some short positions and get defensive.
