The stock market has run up with almost no pullbacks since mid-November 2010. It now appears that some sort of correction is about to occur.
Over the last three months the Dow, NASDAQ, and the S&P 500 have all made impressive runs higher. In that time frame there’ve only been a few short-lived pullbacks. Most investors and investment firms believe that some sort of pull back (5-10%) is necessary before the market can or should move higher. Stocks and the market simply do not move in a straight line.
Two weeks ago when the unrest in Egypt was hitting a peak, we thought that the correction might finally be at hand. It turned out that with Mubarak finally stepping down and leaving Egypt that the market returned to its upward ways. The concern that was cited during the Egyptian turmoil was that this unrest might be a contagion and spill into other Arab nations. If that were in fact to happen, oil prices would most likely move dramatically higher. That was the thinking about two weeks ago.
Now with unrest in Bahrain escalating, it seems that this concern may in fact be coming to pass. In Bahrain the Shiite majority is pressing the Sunni monarchy for more rights and freedoms. Libya too, has seen increasing unrest. And unlike Bahrain, in Libya there has been a great deal of bloodshed to try to quell the protesters. Even tiny Yemen which sits at the bottom of the Arabian Peninsula is in a state of unrest. Should this unrest spill over into the Saudi Arabian kingdom, the price of oil would absolutely skyrocket.
It is Monday morning, 21 February. As I sit here at my desk oil futures are trading much higher. At this moment they are up $3.60. Futures here in the United States are down about 3/4 of one percent. The markets in Europe are down. The real question that the investment community will deal with is whether the unrest is going to continue in the Middle East which will cause oil prices to continue to climb. If oil moves to $100 a barrel quickly, that will be perceived by the world’s economic communities as a significant threat to the fledgling economic recoveries around the world. Keep in mind that even though we’re talking about economies and not specific equities, we’re still looking at fundamental factors. With energy and food costs already being a significantly larger portion of almost the entire world economies than they are here in the United States, this increase in energy costs is sure to slow down the recoveries. Any hint that the recoveries of economies around the world are being threatened will in fact result in the stock market selling off as investors question whether or not consumers will continue to buy.
Keep your eye on the Middle East, this may be the catalyst that triggers the bearish correction in the markets that we have all been expecting. It’s not a question of if a correction is going to come; it’s a question of when and just how deep. Know your trades and know your exit points.