A Better Economy Than We Thought
The market recovered a bit from the brutal decline earlier in the week. While most of the indices were up, the leadership sectors like technology and financials underperformed against their peer groups. Additionally, SPX was unable to test, much less recapture, the 1250 price zone.
The price action during Thursday's session was consolidation but hardly resembled a normal bottoming pattern. Accordingly, the indices may be headed for another new low.
Despite the lack of bullish momentum yesterday, I didn't see much selling in the market either. Given all the recent major shifts in European news and the corresponding volatility in the market, yesterday acted as a pause in the action to let investors regroup and assimilate the news items from the past week.
Today is likely to be an easy paced session, mild upward bias, for the market. Investors may be willing to postpone initiating any major positions until next week. And with minimal announcements from Asia, Europe or the U.S. scheduled, today could be a great day for complacency.
One area of the market that has seen unusual strength this week, despite a horrendous distribution day for most other assets on Wednesday, is oil. Crude oil still trades above $90, and rebounded to $98.50 on Thursday. Oil also managed to move higher from $95 to $97 during the bloodbath on Wednesday.
The higher price for oil most certainly indicates investors favor economic growth as opposed to inflation. If the move higher from oil were a result of elevated inflation expectations gold would not have declined from $1,800 to $1,740 over the same time period.
Believe it or not, higher oil prices are good, in this setting. The higher oil price confirms that investors are not worried about slowing economic growth, which then indicates that the selling over the past few weeks is the pure result of political uncertainty as well as financial distress for isolated institutions.
Over time the strength of the economy will overrule most other things. And so long as investors are willing to believe that the economy is strong, the market will unlikely experience a sharp decline - meaning we should expect 1220 or 1197 to provide support during any additional market pullback.
Economic news picks up substantially next week. And I'm betting the market volatility will simultaneously increase.
