World Markets Outlook 081117

Dear Friends,

The World Financial Markets influence one another to a certain extent. Today, We make an effort to compare the Oil, Gold, US Dollar Index, and the Dow (DJIA) Stock Market Index in the hope of developing some strategic foresight on the future direction of these markets as they relate to each other.

Charts Courtesy of StockCharts.Com

The key to our analysis is Oil. If Oil Price goes down further, this would ease inflationary pressures even more, and thus, there would hopefully, be a little more left over for cash strapped consumers to spend, to sustain their cost of living.

On the other hand, if Oil Price starts to climb back to US$100, then, both the consumers and businesses would be badly hit once more, especially so today, when unemployment is rising rapidly.

A High Oil Price does not augur well for the US and World Economy.

Oil ($WTIC) Price has fallen by US$90.30 or 61% from the historical peak of US$147.90 per barrel, to US$57.60 as at 14 November 2008.

If you take a look at the $WTIC Oil Daily Chart, don't you feel like kicking yourself hard, for not taking advantage of such a well behaved, Strong Downtrend, that just keeps going down, down and down?

There were only two minor rallies, i.e. once in mid August 2008, and another stronger rally in mid to late September 2008. THIS is the type of market we want to trade and make money in. Unfortunately, I have yet to get access to trading Oil CFDs, and I don't like to trade Oil Futures because there is an expiry date.

What is our Market Outlook for Oil ($WTIC)? The Stochastics is showing that Oil is at Gross Oversold Level.

So what? If you look more closely, Oil has been in Gross Oversold Territory on the Slow Stochastics Indicator for more than a month now!!! The Stochastics Indicator is not very useful in a Trending Market, unless you know how to interpret it beyond what is taught in the Technical Analysis books.

Howver, there is an Indicator that is useful, i.e. the MACD (pronounced Mac D), because in this situation, it has been showing a bullish divergence against the Oil Price. Whilst Oil Price is still trending down, the MACD has crossed over and started trending upwards. This is a sign of accumulation by Market Bulls.

It is important to note that we cannot take a Long Trade just because there is a MACD Bullish Divergence. Why? Because the Price is still going down, despite the Divergence, and thus, we need a Trigger Signal to tell us that NOW, is the right time to buy.

To convert this Potential Opportunity into a trade, we need the Oil Price to form some kind of pattern that will give us such a Trigger Signal. The latest Pivot Low is US$55.50, and if this Support Level can hold, while the Oil Price consolidates sideways in a narrow range for a while, or if it forms a W Pattern, then we will eventually have a Trigger Candle.

Charts Courtesy of StockCharts.Com

At present, if we just jump in the trade, we don't know if Price will hold above US$55.50.

It should be noted that any Uptrend is expected to be merely a Medium Term Secondary Wave Correction, in a Long Term Primary Wave Downtrend. So, please be careful with any Long Position you may want to enter.

The Oil Market is already in a Long Term (3 Months to a Year) Downtrend, which is due for a Medium Term (3 Weeks to 3 Months) Uptrend Correction.

If Oil is about to rebound, perhaps we may gather some market intelligence from the Gold Market. Why? Because Oil is THE Cause for High Inflation, and Gold is a Popular Hedge against High Inflation.

However, based on the Daily Chart, the Gold Market seems to be in a Medium Term Sideways Consolidation Price Pattern Formation (SCPF) Mode, amidst a Long Term Primary Downtrend Wave.

Gold tends to have an inverse relationship to US$. When US$ strengthens, Gold tend to weaken, whilst when US$ weakens, Gold strengthens. This is not the case all the time, but sometimes, especially when the "Flight to Safety" story is being propagated, then this relationship holds true, for a while.

Charts Courtesy of StockCharts.Com

In this case, the US$ Index seem to be suggesting a higher probability that the US$ is now toppish, and thus due for a Medium Term Secondary Wave Downtrend Correction, although the Primary Wave is in an Uptrend.

Both the MACD and Slow Stochastics are showing Bearish Divergences, with the Slow Stochastics coming down from an Gross Overbought situation.

Thus, US Dollar seems toppish and due for a Medium Term Downtrend Correction Wave, which is fairly consistent with the Oil Medium Term Outlook which is facing increasing probability of a Medium Term Uptrend Correction Wave.

When Oil Price goes up, US Dollar Index tend to go down.

Occasionally, the US$ strengthens before the Dow moves up. This has been due to the sell down by Global Mutual Funds / Hedge Funds on the Global Markets, so that they can adjust their portfolio allocation, and raise the necessary cash. They then remit the cash into US to be invested in the US Stock Market.

Charts Courtesy of StockCharts.Com

The remittance of the cash funds into the US causes a short term demand for US$, which causes US$ to appreciate a week or two before the US stock market moves up, due to the cash inflows.

However, this does not seem to be the present situation observed.

On the other hand, there are times when there is not much of a correlation, when the strength or weakness in either market is not the major cause or effect on the other.

In reviewing the Dow (DJIA) Daily Chart, we would maintain our Long Term Primary Downtrend Outlook, and a Short Term Sideways Consolidation Price Formation Outlook. The Medium Term Outlook is unclear for this market, and if anything, is starting to yield a slightly bearish feeling, as hopes of a "Climb Back to Health" scenario fades with each passing day, as the pattern gets nearer and nearer to the SMA50 (Red Line), which currently stands at 9758.

CONCLUSION

Oil Market Outlook

Long Term: Primary Downtrend, i.e. Bearish
Medium Term: Higher Probability of a Secondary Uptrend Wave Correction

Gold Market Outlook

Long Term: Primary Downtrend, i.e. Bearish
Medium Term: Sideways Consolidation Price Formation (SCPF)

US Dollar Index

Long Term: Primary Uptrend, i.e. Bullish
Medium Term: Probability of a Secondary Wave Downtrend Correction is increasing.

Dow (DJIA) US Stock Market

Long Term: Primary Downtrend, i.e. Bearish
Medium Term: Unclear with Hopes of a "Climb Back to Health" Uptrend Scenario fading.
Short Term: Sideways Consolidation Price Formation (SCPF)

Lastly, please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

© Copyright 2008 of Praesciens.Blogspot.Com

CNBC - Jim Rogers: Inflation Down the Road

Dear Friends,

I respect Commodities King, Jim Rogers very much. This video is worth watching, if anything, it is by far, the most confrontational interview he has had with CNBC.

Mr. Rogers looked quite exasperated by the fact that CNBC commentators don't seem to understand his viewpoint on Inflation, and the error in bailing out the banks.

Investing in Commodities

In my opinion, despite my deep respect for Mr. Rogers' opinion, investing in commodities is wrong, at least for the foreseeable future of 2 years, from a fundamental perspective. Why? Because there is no way to forecast demand which is decreasing rapidly, in a fast deepening recession.

In such a situation, commodities are goods that are not differentiated, and tend to be the worst hit goods in terms of price falls. Don't get me wrong. I do agree that due to the arguments of Peak Oil, and inelasticity of demand (to a certain extent only, because even consumption of oil is dropping), the longer term demand for oil will cause price to rise. However, that is in the longer term, when the world economy picks up again, and thus, I believe that Mr. Rogers is way too ahead of this demand curve this time.

Having said that, I do agree with Mr. Rogers that the end of the downturn, from a Secondary Medium Term Wave perspective, which he calls a Selling Climax, should be about here. Oil at US$63 is too low, too soon. There should at least be a Secondary Uptrend Correction to the Primary Downtrend Wave. Thus, don't be surprised to see Oil Price rise in the Medium Term, more from a technically oversold position than from fundamentals.

What's the difference? A rise from fundamentals is a trend that is consistent with the Primary Trend, i.e. the Long Term Trend. However, technically, the Long Term Trend is a Downtrend today, and thus, Oil is already in a Primary Bear Market. Any rise in Oil Price from here, is a Technical Correction of the Secondary Medium Term Wave, which will most likely, go near the Price at SMA200 which currently stands around US$110 per barrel, but will not likely breach it, before resuming its Primary Downtrend.

The Medium Term Correction Wave will be a result of overreaction in the market, and thus, Price will reverse and start to move back towards the fundamental consensus of US$110. If you remember, it was only "yesterday" (more like a month or two ago), that "investors" (if you can invest in a commodity), were of the general opinion that Oil at US$90 was a good buy.

However, due to the distress selling by Commodities Hedge Funds, the picture has been severely distorted.

From the angle of the Law of Mean Reversion to the SMA200, i.e. the fact that Oil is technically grossly oversold, a Medium Term Long Position Trading Strategy is not wrong, and in fact, is possibly the sane and right thing to do.

Thus, whilst I disagree with Mr. Rogers on the 2 Year Outlook i.e. I am bearish from a two years' perspective as opposed to his bullishness, I am bullish in the Medium Term of the next 3 weeks to 3 months.

I am not so bullish on the rest of the commodities, not even Gold. Although the Medium Term Correction Wave may be forthcoming as well, as Gold tend to rise with Oil, my opinion is that it should not move as strongly as Oil. This is because Gold is only valuable in two situations, i.e. "Flight to Safety" in times of abnormal crisis, and "Hedge Against High Inflation", which was the case for the last few years, but no longer the case in the foreseeable future of next two years. Gold will fall further from US$700 to even US$600 in the longer term.

Inflation as a Future Economic Problem

As for Inflation as a future economic problem, I have already discussed this issue in my blog entitled Inflationary Holocaust - The Problem of Printing Too Much Money. Such a situation may, or may not arise - no one knows. We have to prepare for such an eventuality, but let's not cry wolf too fast.

Of course, by the time we see it coming, it will be too late to do anything but damage control, which is probably why Mr. Rogers is so passionate about this issue, which is not understood by the rest of the world.

My opinion is that the Federal Reserve has to watch their economic action steps very carefully. The idea of economic stimulus / infrastructure spending is to spend very wisely for job creation, and not spend, for the sake of buying GDP numbers, but not at the benefit of the average man on the street.

This was why I don't agree with economic stimulus packages that merely return money to tax payers. It is the 2nd most costly form of Government Spending, that is ineffective. Of course, the most costly form of Government Spending is to build a white elephant monument at huge expense at no benefit to anyone but a few contractors.

Bailing Out of Banks

Lastly, on the issue on the "Bailing Out of Banks". Mr. Rogers is proposing that there is a difference between what Mr. Bernanke, the Federal Reserve Chairman is doing, i.e. Bank Bailouts, and what was needed in 1929 Great Depression Era. He explained that Mr. Milton Friedman, the Nobel Prize Winner in Economics, had showed that one of the biggest issues that aggravated the Great Depression was the lack of and withholding of liquidity by the Federal Reserve then.

Mr. Rogers is making a case that the provision of liquidity is not the same as bailing out of banks. This is a very interesting proposal, and I must admit that I had always thought them to be the same, as was the view of the rest of the world economists.

If I understand correctly, the proposal of Mr. Rogers is to let the banks with toxic assets fail. Why put in good money (taxpayers' money that has not even been paid by taxpayers) to buy toxic assets? Instead, the US Government should focus on providing liquidity to banks that are well managed and will not fail due to toxic assets.

I agree that this proposal would certainly limit the amount of money to be printed to a much lesser extent, and thus, burden the Government and taxpayers, a lot less. From this perspective, this proposal is desirable to bailing out banks with huge losses. The argument that the Government MAY come out of the banking and economic crisis with a profit is irrelevant.

When has it been the objective of any Government to use taxpayers' money, which has not even been paid yet, to speculate in toxic assets in the hope of making money?

However, Mr. Rogers' proposal does not solve the problem of consequences of bank collapses, and with it, the evaporation of the lifetime savings of many normal, conservative people. Without confidence in the banking system, there would be many "runs" on banks, both the bad ones who should fail, as well as good ones, merely the victim of circumstances or wild rumors.

In my opinion, there is a need for US Government to recapitalize the banks, but not pay for toxic assets. In this proposal, the idea would be to let the banks fail, and then come in and put new capital at the discounted valuation. In this case, taxpayers would be owning a "clean" bank at asset value net of all the needed provisions for losses.

However, such a proposal also has a flaw in that it still does not deal properly with the shortfall in amounts due to depositors. Here, the Government has to make good whatever monies that is guaranteed by FDIC. For the amounts exceeding the guarantee, the Government will have to consider the amount exposed, and then decide when more information is at hand. What is important is not to buy toxic assets at a price higher than necessary, and bail out existing shareholders for their loss.

In any case, the discussion is academic since the Bank Bailout Plans have been rolled out. Or is it? I think the bailout is not set in stone, and if Mr. Obama wins, he may actually push against such a plan after he has access to more information, like how much it will REALLY cost in total? The figures might be so staggering that he may decide against the bailouts. I don't know. I'm speculating.

It is not possible for us to know exactly what is going to happen. It is our job to consider the various scenarios and cater for them in our decision making process.

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008