Explain This Rally!
Research for Online Investors

by John Dalt

7/24/09

The market gods are smiling this week.  How do you explain it?  We were teetering at 880-900; everyone (including your editor) believed we would drop to 820-840 before a meaningful advance would occur.

Low summer volume could have kept a lid on a price recovery, forcing us into a slow and low channel for a couple of months. The danger then became, “What if the buyers throw up their hands and go home for the summer?” My fear was a lack of buyers and we could see a plunge to levels not seen in years.

Instead, earnings expectations are so low that most companies are beating the estimates.  Excitement has infected even the most bearish investor.  Some of the upward pressure is no doubt the result of short sellers having to cover positions.  This is like rocket fuel to a rally.  In two weeks, we are up 11% on the S&P 500.

One respected editor that I read, this morning, predicted 1200 on the S&P 500 in this rally.  Two weeks ago, he was loading his portfolio with shorts and Ultra short ETF’s.  The market has a way of humbling anyone that tries to predict Mr. Market.

Traders must learn to change their perception and position quickly when presented with a ticker that is destroying their positions.  Pride and the desire to prove past decisions correct can be your worst enemy.  I think we are cleared to 1000 on the S&P 500

The Energy Information Agency (EIA) tracks petroleum inventories in the U.S.  We pay particular attention to the crude oil numbers, as I believe we will be paying more at the gas pump sooner rather than later.

This week’s EIA report showed another reduction in the crude oil inventory of 1.8 million barrels. This is the twelfth week of declining inventories, interrupted by one small up week in June. Crude has rebounded this week along with the general market.

When the market was looking lower on concerns that the economy was not recovering, this transferred to lowered expectations for energy needs, thus lower prices for energy.  Optimism in the equities market has buoyed the hope that the economy may recover sooner and demand will increase.

Below is the chart showing present crude oil inventory in the U.S. plotted over last year’s levels.  The lines are getting closer, when they cross the price of crude will never look back.  September to November should reflect a different dynamic on crude oil pricing.

I have warned our SwingTrader subscribers we need to watch carefully for the crude oil that was bought on the spot market last spring and resold on the futures contracts.  This could lead to a short-term glut that OPEC’s reduced exports will not control.  I hear rumors that some of this oil may come on the market in August.  I still maintain Crude Oil is the trade of the year, but there may be some hiccups along the way.

I have posted a good resource article from the EIA on the website.  If you are interested in oil, this is a good read on U.S. Oil Production Trends.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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