Wild Start To The Week

Gold down $36, Oil down $8.  Dow up 200.  What a start, huh?  Let’s all take a breath and sit back and look at this from a helicopter.  Let’s get off the ground.  I want you all to take a 10-day moving average of the markets and what you’ll see is nothing.  If you notice, it’s moving sideways right now.  With all the ups and downs in the past several weeks, the market is basically flat since late July.  But, we get caught up in the daily movements because they are big. 

Let’s look at the fundamentals and the attitude of investors.  First, our latest view of the leading economic indicators shows even more weakness coming in the next few months.  That’s not good for stock prices.  I’ve been writing that the market will turn up before the economy gets good.  However, when the leading economic indicators (not coincident indicators) are still pointing down and not even stablizing, I think that spells trouble.

Many are celebrating that Gustav wasn’t as bad as it could have been.  I’m one of them for several reasons.  But, we must acknowledge that there are 3 more storms right behind Gustav.  It looks like oil was stablizing and wasn’t going down because of Gustav.  So, when it wasn’t going to cause tremendous disruption, down we went.  I’m surprised it’s down this much.  But, oil did drop below its 200-day moving average which is a key technical indicator many analysts were watching.  So, when it fell below, it triggered some sell orders. 

Volume is still very low in the lsat couple of weeks and there still hasn’t been any real demand to buy stocks.  I wrote last week a few more up days wouldn’t suprise me.  I think this rally will run out of gas in the next few days.  I will be selling some positions and/or adding more shorts. 

Besides the economy still being weak, I’m watching the confidence in investors building (contrarian indicator) similar to how they behaved in the spring before we went to new lows.  Even though we’re further along in this bear market and conditions might be slightly better, we’re not out of the woods yet.

So, to sum up, we have a weak economy potentially getting weaker in the next few months, a lot of confidence by investors (according to my measurements), and weak demand for stocks.  So, let’s stay defensive, buy some individual stocks for trading, and not get confused with daily movements as they have lead to nowhere the past several weeks.

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