Tuesday, April 22, 2008

Entry April 22, 2008

With oil in a new range this certainly sets the stage for the equity markets to break resistance levels and hold. For certain a double top with a failed momentum top, on a 5 year chart, it would seem to indicate further downward movement on the S&P500 however there appears to be consolidation of around 1250 that can certainly has been acting as support. Inflation is a key factor that will be affecting the markets. Further fundamental support for a break in resistance is the affect inflation has on bonds. If commodities continue to rally along with high energy prices, this inflationary environment will take its tolls on bonds. Confirmation of high oil prices staying within the hundred range along with continued consumption of gas can keep oil prices in this range for awhile. However it is possible a lag affect will certainly come in later and demand may not be enough to add to rising prices. Although I am no energy expert it seems that prices as fundamentally driven on the supply side currently, although there has been some sentiment in the past months strong enough to have pull back in oil prices from demand. My point being is that with oil in such high ranges it makes an inflationary environment which makes equities seemed overpriced. Once you account for inflation Im sure prices levels will warrant further movement up as equities are not that expensive. Adding to the upward movement will be investors leaving the bond market if inflation keeps up. Added fuel can also come form a weaker dollar, where foreign investors or sovereign wealth funds will be bargain buying. What makes this scenario very possible is that we are in current poor market conditions, for a contraian all this evidence certainly must be positive. However, the big question remains... in what time frame? If economic data can continue to surprise, a movement in the equity markets can quite possibly happen by the end of 08, however if this is a legit move is also another question. To the extent that the markets still may feel left over affects from the credit crisis, as some may claim that the credit conditions are improving, but across the board world wide, things will take longer to truly fix itself out.
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