Will the Fed statement on Wednesday be a catalyst, the "trigger" for stocks to begin a big selloff? Traders will be trying to take the market lower, thinking it must go lower before it goes higher. The problem with this view is that a lot of people see the economy slowly recovering by the end of the year and into next. They want to see a big pullback so a lot of money will come roaring back into stocks and taking the market higher. There's also the possibility that one of the US treasury auctions in the coming week could come in weak and send interest rates higher. That would choke off a recovery and send stocks lower, creating what some have called a "W-shaped" recession.
I'd offer a different scenario, where any commodity selloff is offset by increases in consumer stocks that benefit from cheaper commodities. The US consumer itself benefits if oil goes lower. I think this creates equilibrium and the market stays flat to down slightly while we continue to heal the banks (they are earning their way out of the mess just as consumers are paying off their debt).
Oil hit $72 a barrel and now closed the week under $70 on a strengthening dollar and weak demand. If the dollar continues to strenthen (due to expectations of a US recovery in Q4) that keeps a lid on oil prices and reinforces the recovery model. I also "hope" the Obama Stimulus that has money for alternative energy will help keep a lid on oil prices. Even as oil rises during the recovery, the alternative energy investment should help technology stocks and many people agree that technology, energy and financials are the leaders in this new bull market (it helps that Direxion 3X leverage bull shares come in those 3 flavors: Technology TYH, Energy ERX, and Financials FAS although they also come in the bear versions TYP, ERY, and FAZ.
If the dollar weakens due to a bad treasury auction, that raises oil prices which trade in dollars. That hurts the US consumer but it helps US technology stocks which benefit from overseas sales when the dollar weakens making prices cheaper for foreign sales. So technology and energy stocks rise. If the dollar continues to strenthen as it did this week, that lowers energy prices and helps the US consumer which lifts consumer discretionary stocks.
This is the continued balancing act that has consumer sensitive stocks down one week and up the next. But the overall trend is one of healing and increasing confidence. It will take a poke in the eye to take the markets down. I know thats what some people are hoping for.
I think if the markets make it through to bank earning season in early July the bank results will be positive and financials will lead the market even higher. However, just this weekend 3 banks failed. So problems still exist and theres no way to really know what going on until the banks announce their earnings.
The most prudent course is to be flat the market from here. The options traders call that a straddle, basically placing no bet on the direction of the market. My bet would be no direction at all, but after a 3% down week, I'm not willing to assume the selling is over. In fact, the big selloff may have just begun. If the banks have poor earnings, that would be the trigger for a selloff that takes the whole market down to S&P 850.
We're into the light volume summer months, but given all the bad news we've had in the last year, I am betting on the upside surprises to catch eveyone off guard. The "yield curve" is as steep as its ever been and this is terrific for banks. If they are lending. Maybe the Fed will say something that lowers interest rates and spurs additional mortgage refinancings. That would be a catalyst to send the market higher.
Allright Mr. Bernanke, we're listening.
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