Summary for Week Ending 20th October 2007
Last week I intimated that we would see something come of the outside day of the previous week and I wasn't disappointed. the market fluffed about for most of the week and then decided to put in a nice big decline to end the week. Media reports linking this to the anniversary effect does have some credence as this is a common behavior around disastrous anniversaries such as 1987 and the big question for the coming week will be if this was just an anniversary effect or that there is something much deeper at play.
Going further with the above discussion, it should be remembered that whilst anniversary days can be significant, the underlying state of the market will play a bigger effect. In 1997 there was not real big economic factors at play that would have us believe that the world was coming to an end, however this time around I would speculate that things are very much different. Oil is approaching the magic $100 p/b mark and the US dollar is falling against all the major currencies. The curious side effect of this is that Petrol is relatively cheaper for all of the major currencies and this in turn places even greater strain on the $ because foreign countries do not have to purchase as many US dollars for their Oil as they used to. If you can follow the argument of what was outlined above then you can see the possibility of a 'death spiral' happening here. I'm not that alarmist but things don't look good.
There have been some interesting posts on a couple of reputable finance sites explaining the bull run we had in equities. In a nutshell the logic is saying that the Subprime meltdown caused a shift in capital allocations. Those who who wanted to get out and could get out have done so, and excess capital found its way into equities after finding a new home. Figures indicating that liquidations have settled down would also indicate that new cash to equities will also dry up and thus may add further downward pressure onto the market. Have to wait and see for that one.
Looking ahead I think the slump on Friday was little overdone but if enough people think that Oil is going to cause recessionary pressure, then the consumer led economy of the western world will be stuffed. A flight to quality and a conversion of debt to cash on a massive scale will begin. Its all very doom and gloom I know. Underlying all this is the fact that the bull market is still in play and until we get the correct signal, it will remain so. If most of the player out there are like me however, I think the money is scared money will little patience for pain.
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