A Short Term Turn In The Market?

Posted by Finance Professional on July 11, 2009 under Stock Market News | Be the First to Comment

Yesterday the SP500 hit 870 twice: at 12:00 and again at 2:00 Eastern. It held both times and ended the day at 879. 870 – 875 had been the SP500 target for weeks as the bottom of a trading range. So, the fact that it held, not once, but twice, is very encouraging. This forms a technical formation called a double bottom, which only means that an important level was tested by traders more than once. The market trading bears didn’t have enough selling power to push the index through that level for now. Any good earnings news like the better-than-expected Alcoa results yesterday will give the bulls more encouragement and may force out the bears at some point.

I noticed that all the cyclical / materials stocks were moving exactly with the SP500 all day Wednesday. This is an indication that materials and energy are a proxy for economic recovery. When the market feels the prospects for the economy become better, deep cyclicals and materials move higher. So FCX made a bottom at around $43.50 at both times and SU made a bottom at around $25.75. For both high beta stocks, they are off by more than 20% in the past two weeks, which means they are in their own mini-bear markets. (FCX is off over 30% from its June high).

So, is this a good time to buy? The long term thesis is inflation to correct the Federal deficits and pay for growth in money supply / weakened dollar. Commodities / materials are the best way to play that move. But is now the time?

I am waiting as there is a lot of downside momentum in oil and basic metals(copper). Many traders (probably too many for a contrarian like me), feel that oil is headed to $50. But industry experts tell us that any price below $70 today will shut down supply, leading to higher prices at some point as demand exceeds supply. I have small positions in energy (SU, PWE an UNG) but am out of basic materials (I normally use FCX and BHP). If the SP500 gets back above 900 with some conviction as shown by volume, I will consider adding to the above positions. I hope I can put money back in by next week.

About the Author:
I have a broad range of interests in technology, engineering, design, finance and public policy; a BSBA degree in International Marketing from Arizona State University with undergraduate studies in Nuclear Engineering and Architecture from Oregon State University; I have more than 30 years experience in instrumentation and control design and product development.

Oil reversed early gains and dropped below $60 a barrel on Thursday as a downturn in the stock market added to pressure from high oil inventories and persistent concerns about the timing of any economic recovery.

Light crude for August delivery fell 45 cents to $59.69 a barrel and was on course for the seventh straight day of declines.

Earlier on Thursday, crude prices had rebounded as high as $61.62 after a 4% fall on Wednesday that meant oil was more than 15% lower so far in July.

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