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August 29, 2005

Katrina's mark on the market, Mon., August 29, 2005, 4:08 PM

You have to admit that I'm not surprised that the Dow closed up +66 pts today, a wild day as the monster hurricane called Katrina came onshore from the Gulf. That's the way these things happen.

Let's review the chronology of my reporting from Saturday through to 5am ET this morning.

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August 27, 2005: Week #34 (2005-08-27) in Review (Saturday)

This could be a monster storm, which is still tracking toward the oil rigs in the Gulf. Therefore, crude oil contracts on Monday am will likely go through the roof, and the oil & gas stocks should follow at the 9:30am ET market open. So traders long XLE will get another kick at the can next week. Then, depending on the amount of damage Katrina leaves behind, the high XLE prices might be sustained another week or two.

But, longer-term " say six weeks out (given no more Gulf hurricanes in this area) " I think that the U.S. economic slowdown that has been brought on by these high energy costs (and high food and housing costs) will directly impact crude oil prices and also serve to scare traders out of XLE. You see, if you have a neat profit in XLE, which is my only sector index fund that is up over the past four weeks, you would be hard pressed to give it back to the broad equity market, which is turning bearish."

Katrina now a 175 mph monster, Sun., August 28, 2005, 12:40 PM

Should New Orleans experience the worst-case scenario, I believe that the emergency funds to be provided will impact traders in two ways: (1) the U.S. equity market will pop, giving rise to what I call a very high risk buy" that would then carry prices higher, probably well into October, and (2) inflationary pressures will escalate.

So this could be a time where the USD requires enormous support by the Fed, which would give an immediate boost to the gold market. The damage to oil rigs and refiners in the region will likely be substantial, so I could see crude oil contracts going over $70 a barrel on Monday. The U.S. economy will be disrupted. (All forms of) shipping will be stopped, or at least slowed considerably through the South. Workers will not be able to get to work. Many factories and workplaces will be shut down for lengthy periods. Retail shopping will be stopped or curtailed for major areas. Much higher gasoline prices " and the need to buy emergency food and equipment at raised prices -- will add to the woes of shoppers. Travel throughout the region will be affected."

The New Conundrum, Mon., August 29, 2005, 5:06 AM

(In response to overnight trading) What is happening here is that massive capital is flowing out of the U.S. equity portfolios into bonds, energy contracts and into Europe. The initial reaction is likely to take the broad U.S. equity market down a bit as the Bulls struggle to avoid a complete collapse. Then after the U.S. government comes to the rescue with multi-billions in financial aid, I expect the U.S. equity market to stage a huge come-back."

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I think all traders should do what I do when I blog. I'm not suggesting you blog, but that you write down your analysis and expectations, then follow up to see if you were right, wrong or somewhere in the middle. Over a period of time, this tactic will help you become a better trader.

Of course, in my case, it's not an easy thing to do to put out forecasts and opinions day after day, on all number of matters, for over 10,000 regular readers to see.

In fact, it's downright hard. But, I do it anyway, and enjoy the experience of doing it for you.

But every day brings new info, and new forecasts. Today we witnessed Katrina not hitting New Orleans as hard as it might have. The damage will probably be less than the worst-case scenarios. But, it will be bad, and the Feds will print a lot of money to help people, and that money will create an economic boost.

Hence the equity market lift that I foresaw as possibly going into October will now fall a few weeks short of that, I believe. Then the broad equity market in the U.S., and most elsewhere, will continue its journey south.

Until the imbalances in global currencies and the relationship between interest rates and market risk factors are worked out, I believe the pressure will continue to be down on equities. So, sometime in September, I expect to see the Dow drop once again.

Posted by Posted by Bill Cara on August 29, 2005 04:08:31 PM | Category: Cara Today in the Market

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