I was beginning to think the markets were going to side step its usual summer rally. Who knows, they still might.
Given the geopolitical issues around the globe, a real estate market on the brink of collapse, and consumers getting creamed by a 8.25% prime rate, why shouldn't we expect the worst.
This morning Federal Reserve Chairman Ben Bernanke came to the markets rescue after stating, "We think inflation is going to moderate." Thanks Ben, I think that has become painfully obvious in light of the recent action of the homebuilding and restaurant stocks.
Of course "Uncle Ben" had to hedge himself a little, he went on to talk about inflation risks that could keep prices high.
I was drilling readers almost daily about the bubble that existed in the real estate markets in 2005. Now that that prediction is coming true, don't expect this sector turn on a dime and improve immediately. After multiple years of excesses, it will take an equal amount of time to adjust itself.
What I find amusing is, wherever the masses show the most amount of greed (NASDAQ 2000, Real Estate), it is those areas that seem to experience the maximum amount of pain. Whenever you hear the slogan, "It痴 different this time", don't walk away, run!
With no hurricanes in the Gulf of Mexico (Thank God), oil prices remain in the stratosphere. These high prices act like a huge tax on the consumer. This, coupled with higher short term rates is having a painful effect on the consumer. As temping as it might be, I want to hold off buying any consumer discretionary stocks until September-October.
If the seasonal rally continues to grind into months end, I would expect any rally to slow down as they hit their respective resistance levels.
For now, resistance levels for the major indexes appear to be as follows;
S&P: 1220 Support/ 1290 Resistance
DJIA: 10,700-10,200 Support/ 11,300 Resistance
NASDAQ: 2030 Support/ 2250 Resistance
As the economy cools, I am expecting a pullback in the CRB Index (Commodities Index), the Metals, as well as oil. Again, I would use these pullbacks as opportunities to accumulate stocks.
One subject that is not drawing much attention is the possibility of the fed resuming its rate hikes after a pause. The market seems focused on the possibility of the fed lowering rates after a pause. I, on the other hand, am on the lookout for the possibility of the fed doing the opposite.
At this point, I would not rule out the possibility of a 6.00-6.25% fed funds rate.
