Tuesday, May 20, 2008

Market Correction

The Dow Industrials are down over 200 points as I write this and one has to wonder if this means the recent rally is over. Based on recent sentiment readings, I think this was overdue and healthy. With bulls in the American Association of Individual Investors approaching the 50% level over the last two weeks, it would seem that investors had become too complacent too soon. I do not expect this to turn into anything more than a brief correction.

It would seem also that investors are finally awakening to the potential negative economic consequences of high oil prices. While I think most of the recent spike is not fundamental in nature, it doesn't change the fact that putting $100 in the SUV means you can't spend it somewhere else. It can't be good for the economy for so much capital to be devoted to just driving around.

Speaking of sentiment, the bullishness on commodities, especially oil, is starting to feel like deja vu all over again. Everyone is talking about commodities and everybody is looking for a way to get in on the bonanza. The proliferation of commodity based ETFs looks suspiciously like the proliferation of tech funds in the late 90s. The parade of "experts" on CNBC predicting ever higher prices for oil seems endless. I don't know what will end the mania but when it does, look out below.

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