Stock Market After The Long Weekend

In the bigger picture, there are two market environments - the short term (a month or so) and the long term (six months to several years) that affect all of us.

First, the short-term. A month long selloff has created a high level of fear and a low level of greed - characteristic of at least a short-term bottom. P/Es are down making stocks more attractive for purchase. The stock market does not go straight down or straight up and the present level of gloom indicates a market environment in which at least for the short-term, the sellers have sold about all they want to sell. We thus have the preconditions in place for a reflex, oversold rally.

The long-term outlook is a different story. Investors had begun to look beyond the subprime mortgage, credit market and home price problems to better times ahead. The problem investors are unable to look beyond at this time is the steady increase in oil prices. If the price of oil continues to rise and stays high for a period of time, the "garden variety" recession we believe the economy is in would turn into something more severe.

It is the ability to look beyond the valley of a recession to better times head that starts a new long-term bull market. The price of oil needs to start coming down soon or this bear market will drag on much longer than we had anticipated. Oil, like any commodity, eventually reaches a level where demand is reduced and supply is too abundant. A lot of the oil price increase has been emotional and moods often change when least expected.

One piece of good news is that everyone with a pulse recognizes the problem. Anyway, oil remains the big long term uncertainty for the stock market. Today - oil is down. The opening looks higher.

By ALFRED GOLDMAN
Alfred E. Goldman, Chief Market Strategist at Wachovia Securities, has been in the business since 1960 as a securities and market analyst, writer, and lecturer on investments. A weekly market report, which discusses his outlook for financial markets as well as the economy, is available for clients and is currently published in approximately 40 newspapers.