Yesterday I stated that investors were adopting a wait and see mentality - it lasted one day and the selling commenced. The decision for now is oil at $130+ is bad for economy and what has been done over the last six months to improve the economic outlook is being undone by higher fuel costs. Looking at tech, transportation and small cap over the last few months they have moved higher as an indication and support of economic growth on the horizon. Since last Friday they have caved in breaking the short term uptrend and showing the opposite opinion towards growth. Without a catalyst to reverse this decline look for more downside pressure on equities.
Yesterday was the inverse of Monday with oil higher, gold higher, yields lower and dollar lower. FEAR is the driver as sentiment swings to the downside. The VIX index pushed through resistance and now stands at 24. We are still well off the selling levels in March, but we are well on our way higher. The damage to growth sectors is evidence of the sentiment shift this week. Railroads were down nearly 5% pulling transports below support at the 5100 mark. Semi's revised growth estimates to 4.3% from 7.3% taking the sector down 3.6% yesterday and more than 8.5% the last four trading days. Small caps have shaved off 5.7% and broke support at 383 yesterday. This all adds up to downward pressure giving reason to look at the short side.
To add insult to injury we had Kohn the Vice Chairman of the Fed making statements yesterday he could live with inflation in favor of growth. He was alluding to putting more money into the system, i.e. rate cuts from the Fed. Those choice words of course impacted the dollar yesterday, which in turn put pressure on oil prices and sent a mixed message to the international markets. This is almost the opposite of what Bernanke was discussing on Tuesday. His message rings of the 1970s when the same attempt was made and we ended up with 18% interest rates and the worst recession since the 30s. Maybe it fits with the current theme as clothes have recycled the 70s theme, some hair styles are getting recycled, maybe next Obama will have Jimmy Carter as his VP candidate.
My focus remains patience here as this plays out short term. Now I am looking on both the long and short side of things with the potential swing in either direction still in play. Stay focused and most important stay disciplined.
