Will Drop in Oil Spur a Rally in Stocks?

Here we are in the wake of Rita and the world is breathing a sigh of relief. New Orleans is flooded again but the new damage due to Rita seems mild compared to forecasts. Great fears that may have pushed gas prices up had Rita damaged enough of the refineries in the area, were eased along with oil in a special Sunday trading session this weekend.

What does all of this mean? We think there will be a significant short term effect due to these two hurricanes as we direct many resources into rebuilding the Gulf coast. The market probably thinks the possible economic activity in that region will give a near term rally as early as Monday morning. The futures are not really indicating that too much tonight as they are only up a modest amount. That’s not to say by morning we won’t have more bullishness on display but just that the euphoria of Rita’s weakened hit (this just sounds wrong) hasn’t really pushed the market up much.

Oil and precious metals have taken a tumble since the middle of last week including gold being down over three dollars tonight. We are comfortable having exited our precious metal exposure, at least tonight. Oil, after pushing over $70 in advance Katrina, could only manage about $68 in front of Rita. Tonight oil is trading in the $63 range. You know how we feel about failed rallies—look for more weakness in oil short term.

Gold took a breather since last week after trading almost $480 an ounce it is trading under $465 tonight. We think it could drop to $455 at a minimum. We will watch patiently for another entry point.

As for the stock market, we see stocks on a precipice again. The market has not managed to recover from the selling, on good volume, we saw over the past couple of weeks. Our indicators are getting a bit oversold but… We have said many times that an oversold market is a breeding ground for fear and panic selling. Right now, there seems to be some optimism on the reports from Rita but if the market can’t capitalize on them right now, we think our near term forecast is right on target—lower into October.

We are at a natural point for the market to bounce, though, since it is a bit oversold but we don’t think it’s an easy tradable low. The main concern is the position the market is in. It is possible for a small bounce but we think that bounce should be sold, if it develops. The next big move will be down and it should occur over the next six weeks or so. I don’t think trying to time it any closer than that will help much. Just, do what you think is right.

The bond market had a difficult day on Friday pushing the yield on the ten year Treasury up to 4.25%. We just keep watching for signs of a slow down in the credit expansion. From all reports, it just hasn’t happened quite yet. We will keep a look out. Monday morning brings the August existing home sales report, maybe another good clue. The problem is that the stock market seems to be going down without full confirmation of a slow down in the credit expansion anyway. That may be our best clue after all. We will see.

Dow Industrials: 10,419.59 -2.46 ( 10,500??? Can it happen?)
BGEIX: 13.08 (we are out at 13.34)

PS The blog has 1000 hits. Thanks for coming back.