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Strategies & Market Trends : Ask Vendit Off-Topic Questions -- Ignore unavailable to you. Want to Upgrade?

To: Vendit™ who wrote (7940)	4/18/2005 10:55:40 PM
From: Walkingshadow	Respond to of 8752

I disagree that oil is a significant contributor to stock index price movement for a number of reasons. Oil has been on a steady uptrend for over 2 years. With rather rare exceptions, this has been generally ignored by the market. I have repeatedly posted that I think this is inflationary. The market evidently either disagrees, or doesn't care and wants to focus on other things. The FOMC has shown little concern as well. This is surprising to me, but that is the situation. The proof is in the pudding: if you calculate the correlation coefficient between the price of light sweet crude futures contracts and QQQQ prices, the correlation coefficient works out to be 0.166 (this is just since the beginning of March, but I have little reason to believe extending things back would materially change anything). Note that this correlation coefficient is positive, not negative. There is no inverse relationship between the price of QQQQ and the price of oil, and in fact, the relationship is slightly positive (but weak). Since R2 then would be 0.026, that means that less 3% of the price variability in oil is a function of the price of QQQQ; equivalently, less than 3% of the variability in the price of QQQQ is a function of the price of oil. I also disagree about interest rate fears, partly because the market has concluded that oil prices (now dropping after a topping pattern) are not particularly inflationary. And then there were the comments from the FOMC minutes which some talking head stated caused the market to "breathe a collective sigh of relief" and sent the market rallying because the Fed made it clear they were not going to increase the pace of interest rate adjustments. This was complete nonsense. That supposed sigh lasted only one afternoon, as selling immediately set in the next day, despite FOMC reassurance. Nobody ever thought the FOMC would do anything other than 25 bp hikes. The Fed Funds Futures have all along priced in 25 bp hikes, and have never priced in 50 bp hikes to any significant extent. So, both are red herrings, IMHO. My interpretation is that we are seeing capitulation that is characteristic of a market bottom. I will leave it to the talking heads to come up with "reasons." The charts, technicals, and other indicators tell the story, and dictate the "reasons," which the talking heads might well have to make up as they go along. The "reasons" are not driving the charts, these events were set in motion by forces the were incorporated into the market over a long period of time. It is this simple: the market is in a long-term uptrend, we have corrected back to solid long-term support, that test of support is holding here, and there is a large pool of supportive volume (accumulation) that the market is about to react to by trending upwards. They might well say that oil prices are the reason, but oil is trading now at lows that were last seen in December. Yet precipitously falling oil prices after a double-top failure in the chart were accompanied by stock prices that were falling even more precipitously? Makes no sense. And, as noted above, there is virtually no relationship between the price of oil and the price of QQQQ. The supposed association is in fact close to random. T