A Melman Minute — July 25, 2007

Yesterday’s markets represented an interesting departure from what had been the norm over the past several months or even years. Most frequently, when the markets opened hard down early in the session, buying would usually enter and, by the end of the trading day, early losses had frequently reversed into gains. No so yesterday. Early losses were followed by a short rally and then powerful selling which drove the Dow down by 226 points and the TSX by over 400.

Could this action be a harbinger of a major change in direction? Our only answer is that for the past few years, every seeming reversal to the downside has been short-lived and a prelude to further gains. Will this one be different? We don’t know yet - but the widespread nature of the losses yesterday gives us some pause.

However, today’s early numbers suggest that there will be no follow-through to yesterday’s sell-off with the Dow and the TSX averages both up over 100 points on higher openings. And, as noted a few days ago, the trends in the major averages - both securities and metals - remain solidly bullish and yesterday’s selling was not at all sufficient to reverse those bullish patterns.

There is a unique feature of market watching in the past year which might be referred to as the ‘disappearing problem scenario’. Over and over again, we hear about a serious problem, sure to become a budding crisis, which is bound to drive markets lower - only to have that problem virtually vanish within hours or just a few days.

The Chinese markets collapsed in March - but rallied back immediately.

Early last year, natural gas soared to $15 per contract and the headlines talked of drastic problems for homeowners and businesses. Natural gas immediately reversed and is now at $6 per contract - the lowest in years!

Just a few weeks ago, the price of gasoline was rising rapidly. People were panicking in Canada and the USA - but gasoline immediately began to fall sharply (see chart).

Just in the past few days, Crude Oil made headlines by hitting $77 to $78 per barrel. Just when fear began to set in, Crude fell four dollars in just a few days! (see chart)

All of this seems to have given market observers and investors a feeling of confidence that no matter how serious a problem might appear, it will be solved and solved quickly, so why not use every sell-off as a reason to buy, buy, buy and drive markets ever-higher?

Logic tells us that one of these days, a problem will occur that will carry truly serious implications and will not be resolved quickly - such as the expanding American mortgage and housing crisis. But, then again, when was logic ever the primary motivating source for markets, economists or the general public?

DISCLAIMER

The information presented above is based on data which we believe to be from reliable sources, but the accuracy of which cannot be guaranteed. Any opinions or predictions contained herein are those of the editor and are likewise offered also for information purposes only.

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