Big Brown
From-SaveMoneyGuides.com-”Big Brown’s” trainer was very certain that his horse would win the Triple Crown, and was not shy in his predictions of success. Many investors and financial commentators are still of the mind that the course of the stock market remains on an upward path, and that a winning race is in sight - that the series of setbacks since the highs of last October are only normal corrections in an underlying bull market. The evidence, however, seems to point in another direction.
First of all, the candlestick patterns of the stock indexes back in October 2007 displayed a clear “Evening Star”formation on the Weekly charts, which was an ominously bearish signal. Its accuracy was demonstrated during the next several weeks, as prices fell. But the prediction had not yet borne full fruition, which came into being early in 2008 when prices in the Dow Industrials dropped to the 11,600 range. A bull rally followed, which carried prices to nearly 13,200 in a “double top” this Spring. This formation, too, is a warning of a change in price trend; and, in fact, the Dow did fall to about 12,400 before one last surge of energy last week in response to perceived good news about the economy. All of that enthusiasm was dashed last Friday in the face of an unexpectedly poor unemployment report and, probably most of all, an enormous spike in the price of crude oil.
The news continues to pour out, worse and worse. The New York Times carried a story today (June 8, 2008) reflecting the fact that, whereas manufacturers have, to some degree, held back on price increases of their finished products up to now, they are now at the point at which they cannot any longer swallow the massive increases in the price of the petroleum products which, in turn, are used in the manufacture of the products which they offer to the consumer “over the counter” or “on the shelf.” Even Goodyear, whose tires have been substantially made from synthetic rubber for decades, is now using more natural rubber in the finished product; but Goodyear now finds itself at a second crossroad in that the cost of natural rubber, too, is on the rise.
It is difficult to see how the USA economy can sustain for long such striking increases in the price of crude oil and its manufactured derivatives. Truckers can no longer afford to fill their tanks with Diesel fuel. The airlines, of course, are in dire straits; and that’s a huge other story.
The outlook for corporate profits, and for the stock market, is not good. I would not be surprised to see the March lows, and then the January lows, fall by the wayside within the next few weeks; and there is not much by way of support for stock prices thereafter until the 10,700 level in the Dow - which is about where it was two years ago.
