The Big Flap Over Gasoline

Sunday, October 8, 2006
Macbeth, as Shakespeare fans will recall, was a man inspired by three witches who told him he would become king of Scotland. Their forecast was correct. However, his joy was later undone by the second part of their prophesy, that he would not pass the crown on to his descendents, but be overthrown.

Over the past few months, we’ve made you a similar kind of forecast – giving with one hand, and taking away with the other. Specifically, we said the Dow would make a new high, but that it would more likely signal a peak than the start of a new bull market.

Last week the first part of our forecast came true. The Dow hit an all-time high of 11,850. Meanwhile, the S&P, while well below its all-time high, continues to set new recovery highs. Other averages made a good showing too, including financial stocks and utilities.

This Fall's Big Opportunity

Monday, October 2, 2006
As we expected, the S&P 500 hit new recovery highs last week, closing at just over 1335. Meanwhile, the Dow, at 11,679, is only marginally below its all-time high.

 

Most likely, this rally in stocks will continue a little longer. However, as we also expected, a few small rips are starting to form that could eventually let the wind out of our sails. For one, although the Dow Transportation Index is well off its lows, it has dramatically underperformed the other major averages. Of course, it could still catch up, but if it doesn’t, don’t expect the current rally to last.

More worrisome, the relative strength of the broad market has begun to lag. We were hoping the new high in the S&P would be accompanied by a similar high in the relative strength of the broad market. But it wasn’t. The money flowing into the market today appears to be concentrated in a few safe stocks, while stocks in general are failing to excite investors.

Oil, Guns, and Politics

Monday, September 25, 2006

Usually we begin these updates with a look at the short-term picture for stock prices. But the exciting action lately has concerned another topic dear to our hearts… oil. We suspect you’re curious to know our take on its continuing tumble. So let’s begin with oil, end with oil, and cover the short-term stock outlook in passing …

Oil, the market has decided, is the leading indicator of geopolitical tension in the world today. On one level, that’s right. Oil is crucial to the global economy. The more war, unrest, political instability, or the threat thereof, the greater the risk that oil supplies will be disrupted. That makes everyone want to stock up on oil, which drives the price higher.

However, where the market errs today is in deciding that the reverse is also true – that if the price of oil falls, it must mean the threats to world stability have evaporated. The so-called “logic” of that argument is highly appealing. So much so, that investors have concluded the geopolitical risk so prominent in the past few years vanished once the fighting stopped in Lebanon and oil crossed below $70.

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