In my blogs over the past several weeks we’ve been discussing the state of the financial markets. (See 3 Ways to Tell if a Stock Has Hit Bottom; In Search of Return: 3 Biggest Market Risks and How to Play Them; Generating Returns While Protecting Portfolios From a Crash), In this post, we’ll take a look at stocks, oil, commodities and the Fed.
Stocks Edge Toward Fair Valuation
The Dow has closed lower every day for more than a week. It’s difficult to know if prices will stabilize or fall further. That said, there are two things of which we can be certain. First, we can determine if the broader U.S. stock market is over-, under- or fairly valued. Using the Total Market Cap to GDP ratio, stock valuations have fallen from a recent high of 127.5% on June 23, 2015 to a present level of 122.9% (a ratio of 100% is considered to be fairly valued).
Although stocks remain overvalued they are closer to fair valuation than they were six weeks ago. The other issue we can see is the selling and buying activity of an individual security. This is important because if buying activity is rising while a stock’s price is falling, it may be an indication of a trend reversal. This can be measured using the Chaikin Oscillator. A reading above zero indicates buying pressure while a reading below zero indicates selling pressure.
Oil Prices Still Falling
The spot price of crude oil (WTI, West Texas Intermediate) has been trending lower since closing at $59.47 on June 30, 2015.As I write this, it’s currently under $44.00. Why have oil prices been falling? There are three primary reasons.
1) The U.S. dollar has been strengthening
2) Production remains elevated, causing supply to rise
3) The global economy has been weakening, reducing demand