Oil and Psychology are Changing Market Dynamics

You can't argue that the stock market has been accurately telling us since March 9th, 2009, that the US economy was going to rebound from the worst recession and the scariest economy since the 1929-1932 Depression.

Up until this time, the "market" has been pretty much driven by the rebound in corporate profits and the improvement in the economy.  On Friday we got the employment report, and even though it was better than expected, the "market" retreated.  It is interesting that also on Friday, the price of oil moved up - again - as the speculation and the Middle Eastern rebellions have impacted the news.

The price of oil hit a low of $35 a barrel in December 2008 as the stock market was collapsing, and then it moved back up trying to settle in around $90 a barrel as the supply and demand numbers were looking to be in balance.  But starting in November of last year, the price of oil began a move upward that escalated sharply last week above $100 a barrel.

It is very interesting that for the first time, the relative strength of the S&P 500 (the market) has had a sharp drop "relative" to the price of oil.  This suggests that for the first time since January 2010, the price of oil has to be considered a drag for the market.

So now, how do we relate the price of oil and the battles raging in the Middle East?  We don't have a battle component to our asset allocation process.  We also don't have a political, earthquake, flood, etc. component.  In effect, we believe that Psychology, Monetary and Valuation measure the effect of such variables, but in a quantifiable manner.  And today, this is what our model is telling us.

So, our message today is to shield yourself from the horrendous emotional pressures trying to drive you into the bomb shelter.  We need a pause to refresh in the short-term, but trying to play these corrections is a fool's game when the long-term potential is so promising.

To read today's complete Market Comment, click here.

Don Hays

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