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Out of Range
Posted By Barry Ritholtz On August 9, 2004 @ 3:15 pm In Finance | Comments Disabled
The market’s long flirtation with range bound trading ended last week when the indices broke through the bottom limit of their ranges. From December 2003 to August 2004, the bottom for each major index were 9900 on the Dow, 1887 on the Nasdaq, and 1080 on the SPX.
All three indices broke support lines last week, and the reasons are not hard to discern:
Oil had initially run up, along with other commodities, due to very strong demand from China, particularly over the past 2 years. Add to that the premium built in anticipating terrorism, along with tight refinery capacity. The Yukos situation in Russia has merely been a flashpoint for an already constrained supply demand balance. However, Oil is starting to look “toppy.” (see nearby chart ).
Terror Fears are exhausting the public investor; The most recent upgrade of the terror alert status in NY and Washington D.C. is reminiscent of the pre-war period prior to March 2003. Investors have stepped to the sidelines until the situation resolves itself after the November 2nd.
Weakening Economy: GDP and Employment continues to show signs of slowing dramatically; The most recent data suggests that job creation never really got into high gear. While we have repeatedly acknowledged that this cycle is atypical, it would be unprecedented for the most recent strong move off of the economic lows to fade so totally without any organic, non-stimulus growth.
Federal Reserve: while it seems to be a foregone conclusion that the Fed will go another ¼ point tomorrow, the subsequent meetings on 2004 have been put into doubt. That is a further sign of the market’s fear fo a slowing economy.
You will note that the U.S. elections are not included, as a I do not believe they are a significant factor impacting the markets. (Indeed, the reverse is more likely to be the case.) This is an admittedly minority viewpoint.
The question for the rest of 2004 is whether the indices can snapback into this prior trading range, or whether they will fail at the new resistance levels (prior support is now resistance) of 9,900 Dow, 1,887 Nasdaq, and 1,080 SPX.
The keys to progress for the second half are simple: oil must ease back down, and economic reports need to strengthen. Terrorism will resolve of its own accord via the calendar.
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 nearby chart: http://bigpicture.typepad.com/comments/2004/08/chart_of_the_we_1.html
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