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Minor Market Prediction   May 21st, 2009
What the heck, I'll take a swing       

 
QUICK OBSERVATIONS

More observations...
 

I've been thinking about making this prediction for about a month but have refrained because, honestly, I don't like to be wrong. And there's no more certain way to eventually be wrong than trying to predict the markets, let alone one as crazy as the one we have today ripe with market distortions from government meddling in the economy, government deficit spending of trillions of dollars, and the Federal Reserve continuing to print money and distort interest rates.

But since making a market prediction and being wrong really is no big deal, I'm going to post what I've been privately expecting for probably about a month.

My expectation has been (and was) that both the stock market and oil prices would continue to go up for awhile. The economy had been severely talked down by President Obama so it was natural that when he stopped talking it down, things wouldn't seem as bad. That could provide a sigh of relief to consumers, a more positive outlook, and lead to hopes for a relatively quick recovery.

The stock market has reflected that over the last two months since it has rallied from its 6500-level lows. And the hope for a quick recovery has also caused oil to go up to 6-month highs despite the fact that we currently have an oversupply of oil inventories.

However, my belief is that while the economy wasn't as bad as Obama was implying, it's also not as strong as some seem to think it is today. Obama pushed expectations irrationally low and expectations have now gone irrationally high simply due to the lack of the president slamming the economy on an hourly basis. Obama pushed the rubber band of confidence way down and when he released the downward pressure it snapped back higher than it rationally would.

I think the market is in the midst of moving away from the effects of Obama ceasing to slam the economy and is searching for a more reasonable expectation. The fact that the Federal Reserve is now scaling back its expectations for recovery suggests that the current market does not reflect economic reality. In fact, the market really hasn't moved much in the last month--it seems to have leveled out.

So my expectation is that while the economy isn't as bad as Obama made it out to be, there has been some irrational exuberance since March.

I expect the stock market to go back down as expectations are moderated by reality. These lower expectations, combined with an oversupply of oil inventory, will cause oil to drop back down since a slow economy doesn't consume as much oil.

This would be similar to what happened in the Great Depression when stock markets recovered a lot of their initial 1929 losses by 1930, only to drop even further in subsequent years. Personally, back in March I was rather expecting to see the market bottom out at 4000-4500. I don't know if the stock market will go lower than 6500, but I think we definitely have a downwards correction coming for both the stock market and oil.

But once oil drops I think it'll be a good buy because eventually the economy will recover, oil will be in constantly higher demand, and I think a devalued dollar will automatically price oil even higher. So in the long-term I think oil will be a good hedge against inflation once the upcoming correction occurs.

We'll see... As I write this the DJIA is at 8239 and oil is at 61.05.

Update a few minutes later: A few minutes after posting this I found an article that said about the same thing as I did about the market searching for reality. But we'll see whether my prediction about the future stock market and oil trends ends up being correct.

A growing sense of economic optimism has boosted the market some 30% from the 12-year lows hit in early March. But the tone on Wall Street has been more bearish recently as investors look for more concrete signs of economic recovery.

Todd Salamone, director of trading at Schaffer's Investment Research, said the market is no longer impressed with the "less bad" economic data that helped drive the market higher over the past few months.



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