Markets: What I Watch For and Why

Prior to the commencement of the huge 2008 equity market correction, a rising oil price often meant falling stock prices, because energy cost escalation choked off profits. Oil price up, equity markets down, and visa versa.

In 2008, the first downleg of the bear market meltdown was signalled by coincident price declines for both stocks and oil. Stocks and oil tracked one another through the 2009 low and continue to do so today, suggesting that in a weak economy oil price changes from these levels are not critical.

Since the 2008 bear market began and throughout the recent reactionary recovery, the U.S. dollar has acted as a counterweight, mitigating both losses and gains for foreign investors in the U.S.

What would it take to launch a second bear market downleg in this timeframe? Here is what I am closely watching: Right now we appear to be entering a short term corrective phase for both U.S. stocks and the price of oil. What if a further correction got underway in earnest, and this time the U.S. dollar failed to recover to mitigate market loses? If the dollar fails to act as a counterweight, foreign losses will spiral.

Markets and oil down – U.S. dollar up – no problem.

Markets, oil and the dollar all down together – a recipe for disaster. Tomorrow? Maybe not, but the printing presses at the U.S. mint are running out of control, after Americans voted to take the easy way out. There’s nobody home to arrest the carnage. It’s only a matter of time.