Thursday, September 01, 2005

Katrina and the Stock Market

No question that hurricane Katrina is a terrible disaster which is affecting millions of people near the south coast of the USA. The damage is enormous and the transportation routes that ran through the port of New Orleans have been severed. Oil and gasoline production in the US has been reduced and no one can predict with much confidence the effects this will have on petroleum prices.

Granting all this, it is important to keep in mind that a speculator's job is to predict the future, not the past. My observation is that important lows in stock prices are often accompanied by specific and usually frightening events in the economy or in world affairs: bankruptcies, wars, terrorist incidents, natural disasters, etc. These events serve to crystalize bearish sentiment in stock market and shake out the weakest of the longs, the people who sell when they read scary headlines in the newspaper. Once the news has forced these sellers to act, the way is cleared for a big move upward.

I think the current situation is no different. Newspaper headlines are screaming disaster, as is cable and network tv. When the media devote any space to economic events, they talk about reduced gdp growth, high and rising gasoline prices (even shortages!), the weakest Chicago purchasing managers' report in 3 years, etc.

With all this bearish stimulus I am asking myself "Is that dog barking?" In other words, the media are ecouraging people to sell stock, so is the market dropping? Clearly the answer is no. This tells me that that dog isn't barking and that a big uptrend is underway in stocks.

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