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Clearing The Way Ahead
Author: Ravi Prakash (info)
Website: http://www.optionstradinglessons.com/
Posted: October 22nd, 2007 at 12:52 pm EST
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The Market dropping triple digits on the exact date of the 1987 crash anniversary is just a coincidence. Don’t read too much into it. The Market was due to give back some of its recent gains as I mentioned last week. I just did not expect so much all in one single day. There are several different reasons for this sudden drop, but the main reason is that the Market was a little over bought and it always tends to pull back under those conditions.
A quick overview of current conditions:
The good signs are:
Some fear in the Market (no irrational exuberance here)
A healthy pull back
Inflation is low (or so they say)
A potential for another drop in interest rates by the FOMC
The bad signs are:
Weak earnings this quarter
Continued weakness in the credit and housing markets
An up tick in the latest unemployment numbers
High Oil prices
Weak earnings this quarter actually makes sense considering the recent problems that have been exposed in the credit markets which is related to the risky lending in the housing market. It gives public firms a chance to tone down expectations going forward and to get their act together. We should see an improvement in earnings going forward. Consumer spending has become a large part of our GDP. The high prices of Oil and energy this year have in turn increased the prices of goods and services we consume. This will have an impact on consumer spending, but spend they will. Face it, people still have to fill their cars to go to work. The same work that pays for their mortgage and food. What we may see is a drop in discretionary spending like vacations, dining out and home improvements. However, what they save on that will be spent on gas, food and paying bills. Net result is that people will still spend the same amount of money, just a disproportionate amount in certain areas.
I did not expect to see $90 Oil so soon. Sooner or later it will put a damper on Market sentiment. The recent run up in Oil has a lot to do with the decision in Turkey to fight the Kurds across their narrow border. I think the US will put a lot of pressure on Turkey to back off. If the US fails to do that it will further prove to the world that they are losing control in Iraq. So the latest up tick in Oil prices is purely political and thus I think we will see it go back down to the high $70’s or $80 soon.
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