diesel newsletter

admin — Mon, 19 Oct 2009 08:29:53 +0000

Absolute certainty, loudly expressed, can sometimes lead to total embarrassment. “Big Brown’s” trainer was totally certain that his horse was a “sure thing” to win the Belmont Stakes and, thus, the Triple Crown. He was also very forthcoming in broadcasting his assessment. However, it was not to be. His jockey said later, after losing the race and coming in last, that his horse had just “run out of gas” while rounding the final turn.

There are still some observers of the stock market who hold to the opinion that the current downturn in prices is only a normal correction in an underlying bull market, and that prices will surely turn to the upside. However, their voices are becoming quieter as time goes on. Increasingly, the evidence points to the probability that we are not in a “correction” at all; rather, that the bear market has returned.

Going back in time, the Candlestick patterns of the stock indexes in October 2007 displayed a clear “Evening Star” formation on the Weekly charts, which was an ominously bearish signal. Its accuracy was demonstrated during the next several weeks, as prices fell. However, the prediction had not yet borne full fruition, which came into being early in 2008 when prices in the Dow Industrials dropped to the 11,600 range. A bull rally followed, which carried prices to nearly 13,200 in a “double top” formation this Spring. This pattern, too, is a warning of a possible change in price trend; and, in fact, the Dow did fall to about 12,400 before one last surge of energy a few weeks ago, in response to perceived good news about the economy. All during this time, the market was losing strength and never came close to challenging the highs of last October. All of the last-gasp enthusiasm was subsequently dashed by an unexpectedly poor unemployment report and, notably, by an enormous spike in the price of crude oil.

The bad news continued to pour out, worse and worse, during late May and into June. The New York Times carried a story on June 8 reflecting the fact that, whereas manufacturers have (to some degree) held back on price increases of their finished products up to now, they are at the point at which they cannot any longer absorb the massive increases in the price of the petroleum products which, in turn, are used as raw materials in the manufacture of the products which they sell to the consumer. Even Goodyear, whose tires have been substantially made from synthetic rubber for decades, is now using more natural rubber in the finished product; but Goodyear now finds itself at a second crossroad in that the cost of natural rubber, too, is on the rise.

It is difficult to see how the USA economy can sustain for long such striking increases in the price of crude oil and its manufactured derivatives. Truckers can no longer afford to fill their tanks with Diesel fuel. Now we note that increases in the price of motor fuel in Europe have resulted in protests there too. The airlines, of course, are an entire other story.

The stock market has been in a steep downslide since May 19. A reaction is due; but it seems doubtful that prices will challenge the tops of that date. We do not see Japanese Candlestick patterns in any major Index, in any time frame, which foretell an imminent major reversal of trend. Surprising the Street, Lehman Brothers announced a huge quarterly loss and two of its top financial officers were shown the door today, only weeks after one of them had been the subject of a glowing story in the financial press. (This points up the well-known danger which is involved in one’s photograph appearing on the cover of a magazine of general circulation, or in being the subject of a commendatory article; but that’s a whole other story. One story begets another…).

The outlook for corporate profits, and for the stock market, is not good. I would not be surprised to see the March lows, and then the January lows, fall by the wayside within the next few weeks; and there is little by way of support for stock prices thereafter until the 10,700 level in the Dow – which is about where it was two years ago. The market has “run out of gas.”

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