Please note – Market Updates and I have a new email address – barrjozwicki@gmail.com

The Day of Economic Shocks (Friday)

1) Oil prices soared 8.41%, and broke out to an all time high. The 10.75 point rise was the biggest ever for crude oil

2) Unemployment figures for last month rose 0.5%. That’s the single biggest increase since 1986 Rates went from 5.00 to 5.50%

3) All major indexes fell about 3.00% (2.96 to 3.13%) in increased and above average volume. The only spark of good news is that stocks had risen @ 2.00% the day before.

Mea Culpa – I sure blew the call for a short term top for oil on Friday. The long term chat of oil prices was/is clearly over extended.

Now even the short term chart is beginning to show signs of going elliptical. This is when prices run up so far so fast that, at least in the short term, they have to fall because there is no one left out there to buy. We might get another day or two of panicked higher oil prices, then we should see a significant fall.

What’s fueling the sharp increase in oil prices?

The underlying long term cause is the fall in supply and the rise in demand. However the short term cause is speculators.

You and I are both speculators in oil. Updates has recommended the ETF for oil USO (Have not learned to link gmail yet so you will have to cut and paste web address for chart). USO is an ETF that tracks oil prices by buying futures.

Here’s how it works. On all commodities like oil corn, oranges etc. you can buy "futures" and hold that product for a period of time because delivery of that product is in the future (say August) So a whole bunch of traders buy and sell what they think oil futures will be in August and actually own a specific amount of that commodity for a limited amount of time. In the end someone accepts delivery of that August oil. (see investopedia.com for more – type in futures)

USO and UNG (natural gas) are ETF’s that will never accept delivery of oil and natural gas, but the ETF is driven totally by speculators. Of course huge amounts of $ from other speculators flood the market outside of these ETF’s.

The good news

On the whole Market Update’s suggested list of ETF’s (and one mutual fund) has held up far better than the US stocks for the beginning of May to now. In some cases the rise has been spectacular, +20% for the month. (USO XME KOL UNG) While the benchmark S&P 500 fell, almost all recommended positions moved higher.

The bad news

Do not expect the next month or so to do as well as the last. As stated before technically oil prices are going elliptical and a pull back is around the corner. Traders should take profits and long term investors in those area that went up 20%+ in the last 5 weeks should take some money off the table.

No one ever went broke taking profits. You can always buy back in at the next dip.

Long term energy is still the place to be. Commodities #2. Cash and gold is still king because the intense volatility due to rising oil is too hare to accurately predict. The single biggest worry is rising energy prices damaging global growth.

As Always Do Your Own Research Before Investing

Bottom Line

Long Term Outlook Cautiously Bearish – High oil prices are holding back potential rallies and unemployment figures for May were a disaster. The chances of a world wide recession and inflation grows as oil prices increase. (Caution – this “Outlook” is based on US equities and while US markets greatly influence other markets it is not necessarily the outlook for recommended sectors).

The question for Wall Street is not whether there will be a recession or not, but how long will it last.

Asset Allocation/ Recommended Sectors (long term) – Buy on dips

* 35% Energy –
Energy rich EWZ, (Brazil) & RSX (Russia) two recommended countries. TRAMX – mutual fund for oil rich Mideast
PBW and GEX (alternative energy).
XLE (energy companies) OIH (oil services) USO (oil prices) UNG (natural gas prices)
KOL (coal companies)
* 40% Cash
* 15% Commodities – MOO Agribusiness, XME (mining & minerals)
* 5% Steel – SLX (Steel)
* 5% Gold – GLD

Chief Strategy – Buy the dips of trending sector in bull markets

Changes to Bottom Line Section Bolded

As Always Do Your Own Research Before Investing

  • Share/Save/Bookmark