Is This Rally for Real?
Wednesday, July 23, 2008 | Teeka Tiwari
Editor's Note: Our weekly telephone call to answer your questions has been posted. Listen now to hear Teeka answer more reader questions, including ...
Click Here to Listen >>
- Have banks bottomed?
- What's the best way to play a company's earnings announcement?
- For prospective home buyers, what's the correlation between the stock market and interest rates?
IMPORTANT: Before I get started, Chris Rowe has posted an urgent update to yesterday's article. You should definitely click here to read it now.
Boy oh boy, crude oil sure did an about face didn’t it? We’ve seen spot market oil collapse from $147 to $128 in a heartbeat. And it's these declining crude oil prices -- along with the Fannie and Freddie bail out plan -- that appear to be fueling this nascent move higher.
Sentiment has changed dramatically over the last few days, and a very tradeable rally appears to be in the offing.
But how much of the long term picture has actually changed? Has inflation gone away? Is the commodity bull dead, and are brighter economic days just around the corner?
If this were a fairy tale, the answer to the above questions would be YES, YES and YES!
Unfortunately, to believe this would be to indulge in the most awful form of wishful thinking.
We have a fundamental supply problem in essential raw commodities, matched with exploding third world demand. Any conservation efforts we make here in the U.S. is immediately sucked up by the rest of the world. This is an economic condition that will last for years and years.
So with oil currently breaking down, and an accompanying shoring up of the U.S. dollar, together it's acting like a temporary brace to U.S. Stock markets. THE KEY WORD BEING TEMPORARY.
Don’t let that stop you from making money on the long side. Short term, the reins have been passed from the bears to the bulls. When this occurs, dips can be bought into.
There is no accurate way to gauge how long this bull phase will last. But given that sentiment had reached such depths, and that we have oil prices at our back right now, this move may have some legs.
Will we have enough “juice” to make new highs and turn this market from Bear to Bull?
Doubtful. Very, very doubtful.
Where is the broad market accelerating earnings growth going to come from to push the markets to new highs? (Where do you see earnings growth occurring in the intermediate term? Feel free to leave a comment and share your thoughts with your fellow readers.)
The key for playing the long side during this next up phase is to buy the dips on those stocks you are looking to get into.
Don’t chase. Don’t buy on the up days. All stocks move in alternating patterns of higher highs and higher lows when going up and the reverse when going down. A quick look at a Point and Figure chart will give you a rough idea of a stock's trading range, and will help you identify pullback points for your buys.
So enjoy the rally. Just don’t get seduced by it.
(Please let us know what you think about Teeka Tiwari's article.)
Rate his article here »
Rate his article here »
Teeka Tiwari
Chief Investment Officer
<