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Blood on the Streets

June 27, 2008 – 7:10 pm

Stock Exchange

Throughout the week, the third week in a row, stock prices are falling. As suggested in past newsletters we are currently experiencing a stock market correction. It is not a return to the 2000 to 2003 bear market, however we do have many problems. Traders are now asking themselves if we are going to have a recovery in the second half of the year or if it will be later. Will oil prices go up or down? The stock market is attached at the hip to the oil market. When oil prices go up the stock market falls and when oil falls the stock market rises. Oil itself is attached at the hip to the U.S. dollar which has weakened. Maybe Bernanke should have raised interest rates to support the dollar.

The market is ignoring most all other economic news. For example: the final revision of the first quarter GDP came in on Thursday and it was revised upward again. It stands at growth of 1%. That is not much but the first reported number was a .6% growth, then the second .9%, and then this one, the final at 1%. Exports should get most of the credit. Also this week unemployment claims were flat from last week which was down sharply from the week before, though employment is still weak. Also, sales of existing homes were reported for last month and that was up 2% though prices were down 6.3%. That gives us a sign that maybe we are seeing a light at the end of the tunnel. Prices will likely keep falling but it appears prices are starting to attract buyers to the real estate market.

Obviously, the stock market didn’t care about economic statistics. The focus is oil and inflation. Also earnings warnings before earnings season has put a lot of downward pressure. Actually, earnings in many sectors are doing very well but the future is unclear and traders are reacting. Inflation frightens most traders and they are not sure what the spread of inflation will do to earnings. Many are pushing back their assumption that the economy is going to recover before the end of the year. The economy will grow next year, though it will be slow growth. However, the stock market will rally long before that happens.

The market is at important support level areas. If it does not hold these levels you have to get defensive. That does not mean you sell ‘all’ your stocks. Large cap stocks that are holding up well should be kept. Buy stocks that are in up trends despite the downward slide of the overall market. Sell all your lagging stocks and don’t be afraid of locking in some profits on high flyers. Cash is king and there is going to be a great buying opportunity sometime this summer but just in case we don’t see it until the Fall, cash is king.

Now for some good news: First, markets rally strongly from triple bottoms and that is what is being put in. If the market breaks below this point the rally will be very strong but starting later in the year and maybe it won’t happen until early next year, though that is not likely. How deep this one will be is unknown but it is likely we are getting close. The inflation we are having is demand driven. As the world becomes more wealthy they will push prices up in all commodities. That is not a bad thing. It will eventually mean higher earnings for most companies. At the same time it puts pressure on markets as they adjust to a new reality. Supply will meet the demand. Demand in the U.S. will change, but commodity producing nations and stocks are going to do well. A healthy correction in commodities will mean a strong rally for the overall market and at the same time give traders a great buying opportunity in the corrected commodity area. For this scenario to happen the dollar needs to gain strength. Also, stocks are very cheap in relationship to earnings. Of course they could get cheaper but history tells us that they will not stay cheap.

As Jerry says, “America is not going to disappear”, the world economic growth is not going to disappear. It is time to be very careful. If the market breaks lower, penetrating support on the chart, it’s time to become very defensive. Is there enough blood in the streets? That is the question. If there is we are looking at a rally.

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