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Investors are trying to decide whether this is once again a bull market or just a pause in a bear cycle that has years to run.
Although this seems to be the perennial question, the current market is truly fighting a defining battle as diverse influences are exerting diverse forces on trading decisions.
Yet, there are three classic influences that make stock prices rise. One is the traditional boost of lower interest rates. Second is the presence of bearish sentiment. And third, and most elusive is timing.
First on the hit parade is the interplay between the Federal Reserve, the economy, and the subprime mortgage crisis and its influence on the economy. There is little doubt about it, the housing market's plunge has had a widely felt effect on just about everything, including retail sales, home sales, and the general state of business where a diverse number of industries have had their earnings and revenues negatively affected.
So the Fed is on the side of the bulls.
Second is the general sentiment on Wall Street and on Main Street. There is still lots of fear on Wall Street, as job losses have mounted and significant amounts of wealth have been wiped out. There is also the potential for future litigation and personal liability for those players who are alleged to have been crucial in creating and propagating the conditions that led to the subprime mortgage mess.
Relatedly, on a personal level, many Americans are now fearing for their jobs and their way of life. So there is plenty of fear and caution in the air.
Third, there is the fact that this is an election year. That means that the incumbent president will do everything possible to go out on a high note and to give his party's candidate the best chance possible to continue in power. That's why the tax rebates that are going out this morning are important. The real question is whether this will be enough, or as many think, they will go to pay off credit card debt or in a savings account for a rainy day.
The fourth year of a presidential cycle is usually bullish for the stock market, though. According to a 1992 study on the Dow Jones Industrial average, from 1900 to 1990, the Dow usually rallied in the third and fourth years of the cycle, with a big rally usually starting in June or July and continuing through the rest of the year.
During the 2004 election, the market bottomed in April and rallied all the way through the election before moving mostly sideways for the next two years, just as the study had described.
Finally, there is still lots of money out there that is waiting to come in to the markets, and that when put to work can fuel a rally, theoretically for the rest of the year.
Conclusion
So we're back to the old chicken and egg situation. Is Peak Oil a man made or natural phenomenon. Sure, few people are saying that Peak Oil has been in progress for a while, or that it's close by. Jim Puplava, Matthew Simmons, and to some degree this scribe are on record as saying that it's probably here.
Yet, the big question is whether there is enough oil out there to keep the concept from becoming a reality.
To us, at this point, it seems as if there probably is, but that it's not easy to get at it, and that the major producers, ie. OPEC, have been caught either with their pants down, or have actually looked the other way to let this happen.
Think about it. Venezuela has 10,000 fields that have oil under them but that have been shuttered because the Chavez government can't find enough engineers, money, and qualified workers to get them back online, according to multiple reports.
Nigeria is well known to have vast supplies, but due to political instability, and lack of planning is also falling behind in its ability to maintain its fields. Iran's oil infrastructure is reportedly in a state of disrepair.
Russia also squandered supplies for years due to poor field maintenance. And now recent reports suggest that the Saudis have some decent finds that they aren't even going to tap because they have suddenly become conscious of leaving a legacy to future generations.
To us, it seems as if the oil producers have decided to practice benign neglect at a time when existing accessible supplies are getting tapped out due to rising demand.
And that means that Peak Oil is probably here, but that it may not entirely be a natural depletion phenomenon, as much as a process aided by shrewd, and in some cases accidental and/or blundering behavior on the part of politically and profit minded producers.
In other words, Peak Oil, if that's what we're in the early stages of, might really be a Big Squeeze by the likes of Hugo Chavez, the House of Saud, Iranian Mullahs and the Kremlin.
Chart Courtesy of StockCharts.com
A look at the S & P 500 (SPX, above) clearly points out that the market is consolidating, not fading after making a bottom. The key is whether the S & P 500 can move above 1400 in the not too distant future.
Chart Courtesy of StockCharts.com
A similar picture can be seen in other broad based indexes, such as the Nasdaq Composite, and the Value Line Index, a non weighted index of 1700 stocks that provides an unfiltered picture of the stock market.
Conclusion
So where are we going with this? Anyone with any experience in investing can feel that we are at an important juncture in the stock market. Certainly things could go up or down from where we are, and they could do so in a hurry.
Yet, the bulls do have a few bits of support from the general tendency of markets to rally during the fourth year of a presidential cycle, the favorable interest rate environment, and the generally negative sentiment in the air, on Wall Street and Main Street.
To be sure, there are also lots of negatives. Record high oil prices, an ongoing war with potential for more complications, and a global economy with lots of uncertainty.
There is always the potential for China and Russia, not to mention Iran, Venezuela, and other volatile places in the world to deliver nasty suprises.
But, isn't that where we've been for a long time? We've been navigating uncertainty since 9/11. And lots of bad things have been factored into the market.
In other words, we're a few points away from what could be a rally that could last for several months. Of course a failure here could be disastrous.
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