News / Inter Market Analysis

Drag and Linger By Fitz Aclan July 02, 2008

In the beginning of this year, we had hoped that the spate of rate cuts by the Fed would be good for the DJIA and other markets since this would mean more liquidity. But concerns of inflation all the way to the second quarter of this year dragged the markets down further. It is this dragging and lingering concern that has gotten investors concerned at the present.
Clearly in the first quarter, as far as investors are concerned, the “I” word or inflation has replaced the “R” word or recession. Because of this, the market to watch now is the crude oil market.

And really, things do not look very good at all. Crude oil is stillhovering above US$130/bbl. Oil charts show a continuation of the concern on rising crude oil prices since there is still a strong upward trend.

Besides crude oil, the other key market to watch would be the US dollar. Remember that the main reason why investors continue to buy crude oil above the US$100/bbl is because investors are looking at crude oil in terms of the Euro given that the Euro has appreciated so much against the greenback. Around that time, analysts were pegging the “fair value” of crude oil valued in Euro terms at around US$150/bbl.

And because there has been a lot of speculation and correlation between the two markets, a look at the charts of both the US dollar and crude oil will reveal that the two are almost identical.

In the coming days, I will be talking about the technical charts of the two markets and how they are related. This is important for us to understand things like these in moving forward. In taking a close look at these two markets, we can have a better understanding of the situation. And more importantly, we can gauge whether the market is up for a recovery or not.

Meanwhile, our woes have been complicated by the sharp decline in the US markets. The Dow Jones has declined below 12,000, a key technical support level. A dip below this level has a negative impact and will compound woes brought about by the rising prices of crude oil.

The coming days will be challenging for investors who will have to watch the US markets, crude oil prices and the US dollar. Let’s be vigilant and be ready for more rough sailing.