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The Fear Trade

August 22, 2011 – 5:03 pm

The market started this morning with a bounce, a relief rally that may mostly be related to the Libyan issue with Gadhafi’s 42 year rule ending. Do not expect that country’s oil production to ramp up overnight. It will take time but just the anticipation of the production will keep oil prices down. The price per barrel won’t rise until there is a clearer sign that our economy is not going to fall into another recession. If we do find ourselves with shrinking GDP the pressure on oil prices will be downward. On the other hand oil consumption in Asia is still rising, and in particular in China who is now the largest oil consumer in the world and not coincidentally the largest purchaser of vehicles in the world. At the same time sales of autos is growing in all of Asia.

The other major commodity that impacts stock prices is gold. As long as gold continues to rise the fear trade is on. You can also see it in the prices of U.S. Treasuries with record low yields. Fear is driving these prices and once we see fear start to subside, i.e. gold prices pausing or falling and interest rates pausing or rising then stock prices will begin to recover.

For the time being stock prices are bumping along their recent lows. They need to find support at current prices, but the next move up will require better economic numbers, a lessoning of debt worry in Europe and some kind of serious attack on the debt levels in the U.S. With that we might see fear start to subside. It certainly appears that fear is extreme and that leads to a better stock market.

Good Trading
Steve Peasley

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