With oil prices tanking from $147 to $123 per barrel, traders are eating up US equities but dumping oil stocks. If oil prices continue to fall, this will create a large disparity in the three major US indices. The Dow Jones Industrial Average and NASDAQ indices favor blue chip stocks and tech stocks; the S&500, on the other hand, has a heavy allotment into oil stocks. As oil prices fall, so do oil stocks, which will likely put a drag on the performance of the S&P500.
Consumer confidence, a strengthening dollar, and lower oil prices are all on the radar of US equity traders. This represents a shift from just a few short weeks ago, where the news headlines were dropping consumer confidence, the weakening dollar and higher oil prices. For the moment, at least, it seems that investors are happy with the news and are taking a look at US equities.
A reversal of headlines
Perhaps the most important part of the “news reversal” is that investors are pushing negative headlines to the back of the list through comparative analysis. Generally, when times are perceived as good, no amount of negative news will sway the market. With any luck, this ideology will come back to the market, which has been beaten down by all the factors that are now ironically bringing it back up.
On the same topic, investors will be more open to the remarks by Fed chairman Ben Bernanke and will probably give him a bit of forgiveness on the topic of interest rate policy. Ben Bernanke has stated that interest rate cuts have been stalled, and he’ll consider bumping up the rate in the fall, probably after the election season. If the same sentiment that follows the market now is present when Bernanke raises rates, the market should rally on the news and do well to finish out the year.
Market sentiment is very important
Market sentiment is more important than anyone will say. Following the advice that something is only worth what someone else is willing to pay, the positive thinking of investors will have much to do in a late year rally. The positive sentiment must continue to keep the market above even; there is still plenty of negative financial information coming from banks and brokerages that must be absorbed by investors before the market rallies.
Could banks have overstated losses?
The mortgage disaster could be a reason for a rebound in the latter months of the year. Many banks have already written down billions in loans and have set aside reserves to cover future bad loans. If loan totals are lower than expected in the months coming, these banks will have billions of dollars extra that they had expected to lose. The mortgage market is likely to turn on a whim when it finally does; billions have already been accounted for, and now the market just needs to see if that figure is overstated or understated. Only time will tell.