We are starting the week with the same issues, higher oil prices, inflation, lack luster growth in the economy, jobs and the spend-o-holics in Washington. As we discussed, the Friday bounce was just that, a bounce. There is no indication in either direction that is overly convincing. The catalyst will be investor sentiment or belief. It is easy to buy into the rhetoric of Wall Street and believe everything is okay. There are two key issues facing this market in the foreseeable future, higher interest rates and inflation. By the way both are rally killers.
With the global turmoil heating up the focus has shifted from food inflation to higher oil prices due to production disruption. Some soothing words from Saudi Arabia that they will make up the supply shortage from Libya sent oil back near $98 a barrel. Nice to know that Saudi Arabia is willing to sell us more oil at $98 which two weeks ago they were selling for $82. The recent distraction has taken the focus off agriculture prices hitting record highs. It has also lessened the pressure on interest rates which were inching towards the 5% level on the 30 year Treasury bond. They receded 27 basis point last week to 4.51%.
Economic data last week was mixed, but one report was lost in the Mideast strife, inventories fell. One of the definitions of inflation is too much money, chasing too few goods. I am not saying we are at that level, but the inflation picture continues be painted and when it is finished it will be too late to stop the impact with anything other than raising interest rates. I refer you to the two rally killers mentioned above (inflation and higher interest rares).
I am not trying to be Debbie Downer, but we do have to take note of the risks relative to the market and, more importantly, our money. Thus, as we have done over the last week, we will maintain higher levels of cash, take what the market gives in the short term and keep our eyes open to the developing risks. “Bull Markets” don’t die easy. It takes investors time to come to the conclusion they should sell and protect principle. We continue to believe the buy the dip theory Wall Street so eloquently proliferates will keep the bull running for now.
If last week’s selling turns to buying, take the gains and then get out of the way. The chart below shows the progression of the current trend from the 2009 low. We have essentially completed the first two stages of the rally. There is likely to be a third based on the current data and events. The height and length of the final stage will be determined by the breadth and depth of the current pullback. It could go through the end of the year or it may end in the summer. Time will tell, but as an investor we have to be prepared to understand the events versus blindly following the herd.
It is important to manage risk every day and as a trend matures it is vital to understand the developing events that will ultimately bring the trend to an end. Those events are in play, it is just how long it will take them to mature. Thus, take what the market gives, but keep your stops in place and manage the risk.
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