The Seasonal Aspects of Gold

I strongly recommend a very fine article on the seasonal buying patterns of gold. I had wondered about these seasonal aspects for years, but this is the best article I've read on the subject.

There are very good reasons why gold prices surge higher during certain months of the year. Interestingly, we are just about to enter those months when gold prices tend to move higher with fairly consistent regularity. The most consistently profitable times to own gold are from mid-March to mid-May, late August to the end of September, from mid-October through Thanksgiving, and from early December to the first of February. That's a teaser.

Here's the article that explains the details, by Adam Hamilton:

Gold Bull Seasonals

Enjoy the Olympics!

I am looking forward to watching and enjoying the Beijing Olympics starting tonight. Enjoy the festivities and competition.

Remember petite little Olga Korbut from past Olympics? We all fell in love with her spunk and amazing skill. No doubt the world will discover some new international star athletes over the next few weeks. May they all be at their best in the competition!

What War Does to a Currency

I suppose that war does to a currency the same thing that it does to an economy and a people. May we all learn a lesson from this. This is the daily chart for the Russian Ruble. The Ruble was rubble today!

Crude Oil Drops Below $115, Fuels Huge Stock Rally

Another crude oil price collapse of nearly $5 today has fueled a very solid stock market rally, amounting to a more than 300 points increase on the Dow. What a welcome relief! Gasoline futures prices have also dropped. I hope that the American people will keep up the pressure on their elected leaders to produce more energy at home, or the escalated oil prices will return again soon.

Crude Oil
Stock Market

Not to ruin the party, but there are a few ominous signs to be on the lookout for:

• There is armed conflict today between Georgia, the former oppressed Soviet state that declared its independence after the dissolution of the Communist Empire, and Russia. We don't currently know the extent of this conflict. This has the potential to escalate into a potentially very grave situation. Let's hope it doesn't. The futures markets have dismissed this danger today, but if it escalates or continues for long, it will bring a swift end to lower energy costs. Europe is particularly at grave risk, since they depend heavily on Russia for energy.
  
• Credit card companies have been reporting that as prices have declined in recent weeks, gasoline purchases have once again begun to rise. For the past four consecutive weeks, gasoline purchases have increased.
  
• Additionally, this past Wednesday, gasoline inventory was announced by the U.S. government this week as having declined for a second straight week. Gas price declines this week were probably due to increases in crude oil stocks. There is a fundamental conflict here, closely related to the "crack spread", which is the difference, or spread, between the price of crude oil and its derived distillates. This conflict between gas prices and falling inventory must find resolution. So much the conflict between gasoline and crude oil inventories. Eventually, the two will reach a happy medium and they will come back together. Then, prices will probably begin their ascent once again.
• If this crude oil price collapse is based upon lower gasoline demand, and the stock market rally is also, then when the stock market and the U.S. economy begin to show signs of recovery, crude oil prices are certain to recover and head higher as well. This stock market rally is not based upon fundamentals of a sound economy. Therefore, the slightest hint of higher crude oil prices could send the stock market into a tailspin again.
  

Read Response on Green Faucet

Read my response to an article on the investment website GreenFaucet.com here:

Makes One Long for Gray Davis

Corn at Fibonacci 50% Retracement Level

This weekly chart for corn shows that corn is currently just above $5.10/bushel, which represents the 50% Fibonacci retracement level since the current corn bull market began more than two years ago. Note also that corn prices attempted to breach this same price, but found support at this same level in March of this year. Will it hold this time? We'll know soon!

Corn, Soybeans, Wheat Near Limit Down!

The continuing plunge in commodity prices has brought corn, soybeans, and now, even wheat, close to limit down today. So far, however, no deal! If they don't reach limit down, then the likelihood increases that prices will rebound higher instead.

There is also what I call the "Friday Phenomenon". This phenomenon sees many traders, including me, liquidate their positions because they aren't willing to risk the potential of a reversal over a weekend, when so many variables could change (like weather, war, political unrest, etc.).

One characteristic of physical commodities that provides protection that stocks don't offer is that commodities will never reach zero, whereas stocks may become worthless. Commodities will always have value, and they will eventually reach a floor. Commodities will find a bottom and will therefore rebound at some point. Stocks may reach worthlessness, as the companies they represent may go into bankruptcy and become entirely worthless.

Manic Markets

So far this week, the Dow has had three days of triple-digit up and down days. The market has moved up 300 and 200 points, and down 200 points. Last week, there were two days that exceeded 200 points up, and two days that exceeded 200 points down. If this doesn't make for a manic market, I don't know what does.

Dynamic Technical Analysis and a Setup for a Breakout

Over the past month, the Dow has been trading within the Bollinger Bands and hasn't breached them and closed outside them. This is considered to be a prime set-up for a Cahen breakout based upon the Dynamic Technical Analysis trading methodology. It also suggests a period of minimal volatility on the longer time frame, despite the large numbers of triple digit days. The Bollinger Squeeze indicator also shows the small red dots that indicate that volatility is too low to trade on this time frame. Long-term trades at this point would be very risky and imprudent. When I trade stocks, I will only day trade them for now.

The longer we must wait for that breakout to occur, the more forceful that breakout will be when it occurs. In this daily chart for the Dow, we can clearly see that the Dow has been contained within a trading range defined by the Bollinger Bands since July 16th.

Direction of Breakout

While the breakout may occur in either direction, up or down, the Klinger Volume indicator suggests a breakout to the upside -- for the moment. Volume is building for the stock index futures to move higher.

The Bollinger Squeeze indicator seems to suggest a bearish breakout, while the MACD indicator also suggests a bullish breakout. Note also that the number of bullish candles (green ones) over these past few weeks outnumber the bearish (red) ones by a ratio of nearly two to one (2:1), especially this week. That also suggests a greater likelihood of a bullish breakout. Furthermore, the lows have edged progressively higher, while the highs have remained about the same, which seems a somewhat bullish omen. And most of the trading has been done above the Bollinger Moving Average (20 period SMA). As the older candles age out of the Moving Average, it will begin to move higher, unless prices drop below the MA and take the average lower within the next few days. This might also be considered to be bullish because the moving average tends to serve as support.

Bullish Stock Market Bias

I've mentioned prevously that there always seems to be a bullish bias for stock indexes. This is because the Fed and the U.S. government approve of stock price inflation. All the rescues, bail-outs, stimulus, credit supports, interest rates, monetary policies, PWGFM (President's Working Group for Financial Markets, also known as the Plunge Protection Team) interventions, and liquidity injections are intended to provide price support for Wall Street and create the impression of prosperity. Our government loves inflation, despite the jaw-boning to the contrary. Asset inflation creates the illusion of prosperity, and provides cover for elected officials to continue overspending, but unfortunately doesn't provide any sustainable benefits. Inflation is the policy!

Grain Downtrend Resumes on Dollar Strength

Ideal growing conditions forecasted over the next few days, combined with a stronger Dollar, have lead to renewed selling in the grain complex today. Soybeans are being sold at prices below $11.80/bushel, a 28% drop since the July high of 16.3675/bushel. Corn has dropped 35%! This daily soybean chart says it all!

Crude Drops Below $116

Stocks Finally Respond to Dollar and Oil

The stock index futures have shown a strong response this morning to the increasing value of the Dollar and the plunging price of crude oil. Yesterday's rout has become today's rally! I think the stock markets must be suffering from manic depressive illness!

Stronger Dollar, Cheaper Crude Oil

Crude oil is now trading below $117 despite the damage to Turkey's oil pipeline. As the Dollar continues to gain strength, crude oil keeps plunging lower and lower. Crude oil has now fallen more than 20% and is in bear market territory.

With the plunge in crude oil prices, all those ships off the coast of Iran that contain crude oil in storage may become a bust instead of a boom for the world's 4th largest producer nation. About 3-4 months ago, John Mauldin predicted this possibility in his weekly newsletter. He said that when the price of crude oil started to drop, the owners of all that crude would be in a rush to head to port to unload crude oil as quickly as they could. He said this could cause a glut of crude oil as they all tried to dump crude oil at the same time.

What welcome relief at the pump! But let's not become too giddy. The fundamental problem of depleting global oil reserves hasn't changed, so eventually, crude oil demand and supply will reach equilibrium again, and higher crude oil prices are likely to eventually resume. Still, I think I'll take a drive this weekend to celebrate!

Grains Slammed Overnight

Fresh selling occurred overnight in the grains complex. Since the August USDA crop report will be released next Tuesday, weather will be the driver for grains over the next few days. For now, weather remains accommodative for good grain yields, and prices appear bearish for the moment. I had Corn Flakes for breakfast in honor of the lower prices!

Treasuries in Vogue Too

U.S. treasuries are popular too. The stronger Dollar and sharp drop in commodity prices in combination provide good reason for the Fed to keep interest rates low to foster growth. Treasury futures have reached their highest level in several weeks. However, interest rates are near their lows, and we may see resistance soon at these high price levels.

Does Everyone Love the Dollar?

The Dollar continues to fly higher than July 4th fireworks today. I don't think I've ever seen the Dollar Index futures move so much higher in such rapid order as the past few weeks. The European Central Bank has kept interest rates on hold due to broad weakness in the European Union. These factors have caused the Euro to fall dramatically this week.

Wall Street Runs Red

Bad news almost across the board today turned recent run-ups in stock into a sea of red today, despite some good news on the pending home sales front. Just moments after the close, CNBC announced that Moody's had downgraded American Express' debt rating. Wow! Many of American Express' customers now probably have a better credit rating than AMEX!

U.S. Government Debt Is Popular Today

The $10 billion 30 year bond auction today was very popular. Treasuries moved broadly higher as a result. I couldn't help but wonder if the increased value of the Dollar also made U.S. government debt more valuable as well.

Wheat Limit UP in Closing Seconds

What a remarkable development! Not only were all the grains significantly stronger today, signaling what may be the season low prices, but wheat reached limit up in the closing seconds of the trading session today. What a finish!

Greenback on a Green Streak

As the Dollar bull continues to gain momentum, other currencies are falling like targets in an arcade game at a county fair. The irony of all this is that the U.S. economy is not doing well at all. It's just is is considered to be less bad than most others.

ECB head Jean Claude Trichet this morning acknowledged overnight for the first time that economic weakness in the European Union now outweighs the risk of inflation. This just one month after he raised interest rates to combat rising inflation. Now, it appears that he may be forced to halt his rate tightening schedule to prevent further damage to European economic prospects.

The Dollar appears to be the trade du jour for the time being. Note below the connection between the Dollar's strength and just about everything else! The next time someone questions the link between the Dollar and commodities, just show them this. The next time someone says that having a weak currency is good for the economy, show them this, because that's hogwash! Having a strong currency is the single most anti-inflationary policy that can be implemented. Even maintaining a strong currency against other world currencies helps to keep inflation in check because it helps to prevent importing inflationary prices from other countries when the United States imports their goods. As goes the Dollar, so goes inflation. They move inversely to each other.

US Dollar -- On a Green Streak
Euro - almost a mirror image of the Dollar
Gold
Crude Oil
Grains
Australian Dollar
Canadian Dollar
Great British Pound
New Zealand Dollar
Swiss Franc
Chinese Reminbi Yuan
DJ Commodity Index futures

Grains Rise Overnight, Showing Firming Prices

Wheat has rebounded with the greatest energy, and for the first time in weeks, both corn and soybeans were higher during both overnight trading and the day session as well. In this daily chart for wheat, note the very large engulfing pattern today as well as the rising volume indicator in the lower panel. This Klinger Volume indicator has not only turned higher, but it has crossed over its moving average and the moving average has also turned higher.

Making Revisions for Longer-Term Strategies

Over the past few days, I have begun to make revisions to my longer-term trading strategies. I want to start taking longer-term futures trades, and I am devising methods for positioning in an emerging new trend to take greater profits on longer-term trades. By taking longer trades, I can take more of them, and I am less dependent on the intra-day price swings and market noise that often destroy the margin accounts of novice traders. By trading more different types of futures vehicles, I not only diversify my trading, but I can also take smaller positions in each trading instrument while simultaneously making more money.

Highest Jobless Claims Since 2002

The weekly jobless claims data has climbed above 450,000 for the first time in six years, deepening the worry on Wall Street today. Jobless claims are significant because if they continue to rise , they signal higher unemployment ahead and a worsening economic outlook. Higher unemployment tends to portend the potential for an endless cycle of lay-offs, lower consumption, leading to even more lay-offs. Jobless claims the remain above 400,000 are considered to be a sign of recession. However, Congress recently raised the benefit period, so a rise is to be expected, as recipients stay on benefits for longer periods. Combined with disappointing July retail sales data from WalMart and Target, the sentiment has turned from dawn to dusk fairly quickly today.

Despite the gloomy data, the stock index futures haven't been nearly as negative as I might have been expected. Optimism still seems to prevail in yo-yo rises and falls. Time to roll with the punches.

Crude Rises on Destruction of Key Pipeline

Kurdish rebels claim responsibility for destroying a key oil pipeline traversing Turkey, and the price of crude oil has firmed as a result, rising more than $4 to approximately $122. Turkey says the pipeline, which carries approximately 1,000,000 barrels a day, will take two weeks to repair.

Treasuries Regain Ground on Strong Auction

The U.S. government auctioned $17 billion of 10-year treasuries within the past hour, and this chart shows the result. The bidding was surprisingly strong, and interest rates were driven down as a result.

Dollar Reborn

It is amazing that over the past few weeks, the US Dollar has found new life. This chart shows the Dollar Index futures and the increasing strength of the greenback. This is really more of a global weakness story than one of Dollar strength, especially since the U.S. government continues to pile on and even accelerate debt accumulation. With growing weakness in Europe and around the world, there is a growing perception that the United States' economy may be ahead of the rest of the world in working through its problems. As long as investors are willing to buy Dollars or U.S. debt, who am I to argue?

Dow's Rocky Road Back to Black

As crude oil continues its price plunge, stock index futures have found their feet. So have grain prices. Strange day!

Grains Crash Through Floor to New Lows

Grain prices have collapsed again today, selling off furiously almost from the open. This intra-day chart for the Deustche Bank Optimum Yield Agriculture Excess Return Index shows how powerful the trend is.

Freddie Bleeds Red, Stocks Move Lower

After a very stout rally in stocks yesterday, there has been no follow-through today, largely due to a terrible earnings report from Freddie Mac. Freddies loss was nearly four times more than some analysts had expected. Trading has been very erratic and messy. Bulls can be grateful that stocks haven't dropped more.

Trounced Treasuries

There was a very nice sell-off this morning between 8:00 and 10:00 am EST in treasuries, raising interest rates by about 10 basis points. Good trade!

MIT Announces Solar Power Breakthrough

Here are two fascinating articles that I found regarding a breakthrough at MIT that is relatively easy to implement, cheap, and solves one of solar power's most difficult challenges -- storing the energy. "It's cheap, it's efficient, it's highly manufacturable, it's incredibly tolerant of impurity and it's from earth-abundant stuff," the MIT scientist explained. What more could we ask for! Imagine a day in the near future when every house has on its roof and windows all the ingredients for energy independence, without the need for even a utility company! Great idea!

Breakthrough Catalyst for Splitting Water

MIT Develops Way to Bank Solar Energy at Home

Verdict on the Fed Is In -- Stocks LIKE It!

Having now surpassed 300 points on the Dow today, it appears that the stock markets like what they heard from the FOMC statement this afternoon, since the stock market indexes are higher, and treasuries have begun to sell off. While 80% of the rise occurred prior to the statement, it appears to have been mostly in anticipation of that statement or as a reaction to further weakness in the price of crude oil (or perhaps the combination of both). It appears that the statement by the Central Bank is perceived as modestly more hawkish toward inflation, but without any sign of an imminent tightening of interest rates in the mid-term future. The Fed Fund futures are higher for the December 08 FOMC meeting.

Following Solid Rally, Grains Sell Off Again

After a good rally throughout almost the entire trading session, grains sold off again in the closing hour of the trading day, leaving the session relatively even for the day. The Deustche Bank Optimum Yield Agriculture Excess Return Index, as shown above intra-day, ended modestly higher on the daily chart (not shown). Volume was very heavy -- about 1/3 greater than yesterday, and the largest volume in about three weeks! This high volume and higher close is probably a sign of greater relative balance between buyers and sellers in the grain markets. Wheat was higher throughout the entire day, until just the closing minutes of the session. This conflict between buyers and sellers appears to be a good recipe for more consolidation and range trading. However, the undercurrent of weather and the Dollar always play a potent role as well. The most important USDA crop report of the season will be released one week from today.

Fed Decision Aftermath

Stocks -- moderately higher
Treasuries -- modestly lower
Crude Oil -- somewhat lower
Grains -- n/a (market closed at moment of decision)
Gold -- lower

More Great Grist from John Mauldin et al

John Mauldin sent out a great article written by one of his buddies, Michael Lewitt of Hegemony Capital Management, this week. This is great stuff! After listing the names of the 19 private companies that were "protected" by the SEC in it's recent short ban, he makes some fascinating analytical points. Here is a tiny sample:

Among the more interesting aspects of this list is the fact that more than half the names are non- U.S. firms enjoying the protection of the U.S. regulators and the fact that some large U.S.-based firms that are clearly being pummeled by short-sellers are missing from the list (i.e. Wachovia Corp., AIG International Group, Inc., Washington Mutual). The ostensible basis for inclusion on the list - status as a primary dealers plus Fannie and Freddie - speaks to the reactionary nature of the rule-making. Finally, this desperate measure is yet another example of the capitalism-for-the poor, socialism-for-the-rich economic model that American financial authorities have adopted over the past two decades.

Wow! One certainly must wonder why some foreign companies were protected, while feeding some large and vulnerable American companies to the sharks! Maybe it's time for more torches and pitchforks as the American people march on Washington!

What a great newsletter. Here is the entire copy from John Mauldin:

Survival of the Unfittest

Grains Gains

This composite chart for the grains today demonstrates that despite the strength of the Dollar today, all three of the grains have firmed up and moved forcefully higher. Given that this rally has occurred while the Dollar was also rallying, it underscores the strength of the grain rally. It takes a great deal of buying to break through the bearish current of today's Dollar rally.

Resolution: Battle of the Grains

The grains have all battled resolutely back from what was expected to be another round of selling today. This is remarkable, given the strength of the Dollar today. There is apparently some very firm buying interest beginning to hunt for bargains. This corn chart for today shows the push and shove that exemplifies the grain markets today. Soybean and wheat prices are even more firm today.

Stock Index Futures Bolt Higher

In anticipation of good news from the Fed this afternoon, stock index futures have shown strength today also. Buy the rumor....?

Shock -- Grains Move Unexpectedly Higher

Grains this morning have shot higher at the beginning of the day session, surprising many market analysts, including me. Weather is usually the driver at this time of the year. As I've said many times before, anything can happen!

US Dollar Gaps Higher

Everything seems to be following the lead of the US Dollar today. Note the gap higher on the tick chart (right side) for the Dollar Index futures. The daily chart is on the left. How long has it been seen we have seen genuine Dollar strength? I had noticed last night that the Euro was plunging, even during evening hours in the United States, when the Europeans were asleep. I had no idea what the cause was.

The Dollar is showing even greater strength today, more than I have seen in many months. As a result, many commodities are plunging, including grains, crude oil, and metals, and many currencies are also weaker against the greenback. Even the currencies that were trending higher, and that I highlighted over the past few days, are giving up some ground today against the Dollar. Treasuries are selling off today, as higher interest rates are often contemporary with a stronger Dollar. Welcome back, greenback!

From Bruce Knorr's commentary this morning on farmfutures.com:

The dollar continues to rally this morning ahead of the latest policy statement from the Federal Reserve on interest rates... The Fed is expected to hold rates steady, with traders watching for shifts in the central bank’s focus on inflation that could signal higher rates ahead.

With commodity prices having plunged so much in the past several weeks, this could give the Fed more than ample cover to surprise the market with a somewhat dovish statement this afternoon. It should be exciting, regardless of what the Fed does.

Snowball on the Dollar Downhill

I have written several times to correct erroneous ideas about the role of speculators in the commodity markets.

Now, I'm going to write why I feel so passionately about this subject.

Frankly, over the last two months, I have traded primarily treasury and stock index futures. Since the soybean bull ended, it simply has been more difficult to trade, and less profitable. One reason may be that fewer speculators are trading that market. It's less liquid, and more erratic. I can just as easily trade stocks, treasuries, gold, or whatever else. My trading methods will work regardless of which vehicle I trade. I don't really care which one I use.

I don't frequently trade crude oil because the market moves so quickly that I have difficulty obtaining accurate executions. I only trade markets that are very liquid, provide me with good executions, and offer minimal slippage. The S&P 500, treasuries, and Eurodollar futures are the best. Eurodollar futures don't show much movement, so I don't bother with them.

As the U.S. Congress continues to spasm uncontrollably from bail-out to bully in the financial markets, they exponentially increase the risk of causing severe or even permanent (see #4 below) damage to their functions and stability, despite the claim that stability is their goal.

If Congress attempts to force traders out of the commodity markets, it will have one or more of the following effects:

1. Higher Commodity Prices -- The commodity prices themselves will gyrate out of control, as they have before when liquidity was driven from the financial markets. Erratic price movements that skyrocket one day and plunge the next were the reason why the futures markets were created in the first place. The more liquidity that exists in the futures markets, the more stable they become, because no one market participant can control the market. Traders provide this liquidity. Liquidity is both a benefit and a protection for all market participants. It benefits everyone!
   One example of this is the wild price swings we see for commodities that are not traded in the futures markets. Not only do prices swing wildly and erratically back and forth, but these commodities have, over the past year, risen much more rapidly and much higher that the futures-traded commodities. Higher prices are the certain result when speculators are forced out of the futures markets.
   The super rich aren't deterred when Congress slams the door on traders, either. They can simply buy the farms that produce the commodities, the mines that produce the precious metals, and the land that produces the oil. Then, they can just sit on those assets until prices rise to more competitive levels. They engage in hoarding!
   
2. Long Lines at the Gas Pump -- If Congress attempts to manipulate and bully commodity prices lower, those commodities will end up in parts of the world where they are welcomed and where people are willing to pay market prices for those same commodities. Long lines at gasoline pumps in the United States will be the result. Less oil will come to these shores, and that means shortages and long lines to obtain the scarce commodity, assuming it is available at all!
   
3. Collapse of the Dollar -- If higher taxes and unwelcome financial markets leave investors feeling that their capital is at risk in the United States, they will move those funds elsewhere. I saw this in South America, and despite the disastrous consequences, tyrants continue to attempt to bully the markets into submission. It never works, and it always has terrible consequences. One of these consequences will be that as more and more people send their money outside the United States, the volume of selling activity will cause the US Dollar to decline even faster. As the phenomenon snowballs, it accelerates, and the Dollar could collapse in a Weimar Republic-style death spiral.
   In January, when Jerome Kerviel, the rogue trader at Societe Generale, was discovered, the liquidation of about $16 billion of his trades caused the Dow futures to plummet 570 points in a single day. It has similar effects on many futures, including crude oil, gold, and grains. Fortunately for the U.S. stock market, it was closed that day for the Martin Luther King holiday, and the market recovered before the open the following day.
   If just $16 billion of rapid capital movement has such an impact on the financial market over a holiday, what would the impact be if $1-$2 trillion moved out of the United States over a period of several weeks or months? The impact could be cataclysmic for the Dollar! As one government followed by another decides to liquidate their Dollar reserves, the Dollar will accelerate downward. This, in turn, causes the prices of food and fuel to skyrocket in inflationary mushroom clouds. It could initiate panic selling not only of the greenback, but of US treasuries also, setting off waves of hyperinflation. Is that an apple cart we want to risk upsetting?
4. We Lose the Markets to Overseas Competitors -- The United States no longer has a monopoly on the world's financial markets. The fact is that there is more money elsewhere, and competitors are chomping at the bit to attract more capital to their own markets. When investors around the world find the United States financial markets inhospitable, they will simply transfer their funds to other futures exchanges around the world. There are active and liquid futures exchanges in Europe, China, India, Singapore, Dubai, and several other countries. Once those customers are gone, so are the jobs and the competitiveness of our markets. Do we want to give up still another dominant market position, and send still more business and more jobs overseas? Why do you think that commodity expert Jim Rogers moved his family and business to Singapore, and is liquidating all his Dollar holdings? Because the markets elsewhere are more hospitable!
   

I don't care about the market. I DO care about the Republic!

Grains Begin Trading Again

Within just 30 minutes, buyers in the grain market stepped in and eliminated the build-up of sellers. There was an ask pool of more than 40,000 for soybeans. The ask pool was eliminated so that both corn and soybeans have begun trading again. This is fairly common. I have even seen days in which some grains reached both their limit up and limit down prices on the same day! Anything can happen!

Corn and Soybeans Limit Down

Guided lower by the collapse in crude oil prices, corn and soybean prices have both reached limit down today. Both show solid volume in the ask pool, also. What an amazing day!

Crude Tosses the Stock Market a Bone

Stock markets have gotten their second wind today as the price of crude oil has suddenly plunged more than $5/barrel, briefly dipping below $120/barrel. The Dow momentarily moved into positive territory for the day.

If crude oil continues to drop, it will likely create a stock market rally and possibly bring the U.S. economy back from the brink of a recession. However, with a recovery, the global supply shortfall in oil will eventually lead crude and other commodity prices to rebound just as rapidly as they fell.

Last night, when crude oil rose $1 at the open in the face of Edouard, but then didn't move higher, it appeared to me that this was a sign of crude oil weakness. In a downtrend, even bullish news is often quickly dismissed, and this was a good example of that phenomenon manifesting itself. Instead of prices rallying higher, traders will use these events as opportunities to enter the downtrend and sell into the rallies. I think that's what we're seeing today. All of the news was bullish, but traders have used it as an opportunity to sell the market instead.

There may be even more bearish news ahead for the price of crude oil. Negotiators announced this morning that they may be close to a break-through in negotiations that could bring peace to Nigeria, and restore 1,000,000 barrels a day to the world crude oil market. If that occurs, we could soon see crude oil prices well below $100.

More Commodity Weakness

Commodity prices are showing some signs this morning of a possible renewed break-out to the downside. The Dow Jones AIG Commodity Index has struck a new low this morning for this correction, suggesting more downside risk.