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Oil, Retail Trade Places


Script was flipped in yesterday's trading.


It was one of those sessions that saw every trading theory put to the test and in the end the market, while higher, couldn't maximize gains.

The script was flipped in oil, retail and even financials. Now the consensus is that demand does matter (I don't think anyone talked about the impact of the dollar on crude yesterday) and at some point even sizzling economies like China and India are going to choke on higher prices.

Ironically, this eureka moment came at the very time when crude bulls were handed the best ammunition they could ask for when the EIA posted dramatic drawdowns on crude and gasoline. On Wednesday the only thing more frightening than the prospect of higher crude was more damage in the financials. Yet the financials turned around and some like Goldman Sachs (GS) acted like they were ready to stage meaningful and sustained rallies. On the other end of the spectrum the moves in Ambac (ABK) and Countrywide (CFC) were inconsequential. The moves in both seemed more like a couple of also-rans (temporarily) bouncing off the canvas on the strength of their peers.

Citigroup (C) which, along with Lehman (LEH) remain the tail on an industry that could only be described as a long-tailed cat in a room full of rocking chairs, traded higher. The KBW Bank Sector Index (BKX) was higher but is still listing dangerously close to a vitally important support point (74.0 has held now on four separate occasions in the last six months). Of course, I came into Thursday morning worried about a collapse in banking stocks after worrisome comments from Key Corp (KEY) and negative scuttlebutt about the health of Lehman Brothers (LEH).

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Reverse Psychology and Flipped Scripts

Speaking of the script being flipped, if global demand decreases for crude oil does that mean economies in general will slow as well?

I think it's this logical connecting of the dots that cost the market greater gains as the session moved ahead. Less spending on gas means more profits for other industries like retail, which is beginning to smell like a rose this week as strong earnings have come from the top end, with names lie Polo Ralph Lauren (RL), and the very low end, with names like Big Lots (BIG). Another odd twist to what's going on in the economy is the possibility that things get better after the Fed begins to raise rates. My line of thinking on that is right now banks are hoarding money, but if comments like those from Janet Yellen made this week are on point then the Fed could be looking to raise rates next year (it's a little preposterous to think it would totally reverse course and increase rates this year unless there's a dramatically sharp turn in the fortunes of the housing market).

Once banks see the Fed no longer has to flood the system with cash that will be their cue to open their own spigots, albeit with the kind of caution one would use to fill one of those plastic toddler swimming pools indoors.

Banks will not have to wait for the Fed to change course just for the conventional wisdom to come to that conclusion. I've been modeling for the Fed to raise rates in 2009 but have backed off from our earlier conclusion rates could move back to 4.0%. Still, a better economy (which is what 1.5% 4Q08 GDP would be) and persistent pricing pressure will eventually force the hand of the monetary regulatory body.

When it comes to inflation a lot of that is out of the hands of the Fed even if higher rates mean a stronger dollar.

On a related note, the action in gold is very telling, adding credence to the notion there will be a policy shift at the Fed. The move also underscores the speculative excesses are slipping: This next leg down could see the 200-day moving average violated.

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Is oil the next bubble?
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