Stock Market Analysis – 12-31-2008
What a historical year 2008 turned out to be. With nearly a 50% drop from the year’s high to the low, we experienced volatility not seen for over 20 years. With a new president coming in and a single party controlling the government, there will be a lot of changes in the near future. Whether it’s for better or worse will be determined though. Once the volume picks back up after the holidays, look to see if the volatility spikes back up or if the market stays in consolidation mode.
My top thing to watch for 2009 is probably oil right now. The bubble will finish deflating, and at some point OPEC will find the correct supply balance for the shrinking markets. Since oil is less correlated to the general market than other equities, even if the market fails to turn around in 2009 I think it still has some potential to be a good bullish play. If the market does turn around, then all the other usual suspects are in play – AAPL, AMZN, GS, MOS, and whatever else shows up under my bullish stocks.
Oil Bubble Popped
Back in June I talked about the oil bubble that was forming. That one turned out to be spot on, and as with most bubbles, the pop tends to push the oversold state to the extreme too. Once again, don’t buy oil against the trend since it could easily see $30 before it turns around. Demand is shrinking, but so is OPEC output and eventually they’ll find their sweet spot again. This is one industry where I wouldn’t mind trading against the general market direction, so at least it gives an interesting long that has potential to do something within the next couple years.
Triggers
- Breakout Above $80 – Long term buy
- Below $55 – Shift breakout points according to monthly trend line
Oil Getting Frothy?
First of all, don’t take this post as a suggestion to run out and short oil. It’s never smart to trade against a trend as strong as this one, but if you have major profits it may be time to start thinking about taking some of them off the table. A classic bump and run pattern on the oil weekly chart (the monthly chart shows the same thing) suggests that we could see a decent drop while still keeping a strong long term pattern intact. Often times a bump and run leads to a bubble popping and a reversal, but usually it will at least pull back to the bottom trend line if it’s in an unsustainable run as I believe oil is in now.
Keep looking for the typical bubble signs like those you saw with the housing market, i.e. normal joe schmoe friend that knows nothing about investing starts asking you how to trade oil futures since he heard they’re an easy way to make lots of money. Again, don’t get bearish on oil yet. You never want to be the first or the last one in on a trend. Or at least don’t blame me if you do and it runs up over $200. Just start watching for the signs…