In the aftermath of the storm it appears that we are now convinced that we can withstand anything. Oil futures surged as traders again dared to dream that the worst is over. The doom and gloom and fear seems to have gone away and the appetite for risk is coming back in a big way. Across the commodity spectrum it was clear that the cost of fear was coming out of the market. Yields are rising as bonds are falling. Gold and silver fall and oil and products are looking beyond demand destruction to a world where demand will keep prices elevated. As I wrote on August 11th in the depth of the markets despair, Rumor and rumors of rumors finally took over common sense and fear was at a premium. The VIX soared to a four year high as sell stocks and ask questions later became the mood for the day. Rumors about a French credit downgrade and the health of some French banks created a selling frenzy. Forget that all those rumors were denied by all major reporting agencies, when traders are blinded by fear they might believe almost anything. I went on to say, When people trade irrationally there can be some marvelous opportunities for those who keep a calm head and a keen eye. The best way to combat fear is to have a plan that seeks to find moves that are overdone based on reality and to doggedly control your risk. If you have a solid plan that you stick to then fear goes away and you can take advantage of what the market brings you.
For the crude oil market that was a great buying opportunity. Not that it was easy. In fact when I was trying to take the long side of the market I was feeling alone. A CNBC poll of analysts and traders showed 11 out of 12 respondents expect oil prices to fall while only one - Phil Flynn, Vice President of research at PFGBest in Chicago - believes prices will rise.
Yet It was clear that fear had taken over common sense. The fact and the valuations did not make sense. They were selling stocks just because other stocks were falling with no thought to value. Fear generated by rumors used markets to sell off on what was unknown instead of what is known.
That fear spread to Europe as reported by Dow Jones Newswires, Euro-zone businesses and consumers were significantly less confident about their prospects than expected in August, stoking fears that the currency area's economy is grounding to a halt and may even be heading for its first quarterly contraction in more than two years. The European Commission said Tuesday that the headline Economic Sentiment Index of its monthly survey plunged to 98.3 in August from 103.0 in July--the weakest reading since March last year and well below economists' expectations of 100.5.
The lack of confidence is causing a slowdown in the rebound of the Euro and a pause in the oil rally. Still it appears that without any more news on major banking problems in Europe, the pull back may be a good opportunity to position for a intermediate up trend.
The AFP reports that Nigerian authorities have made a number of arrests in connection with last week's suicide bombing of U.N. headquarters in the country's capital, but police have declined to provide further details. Friday's attack killed at least 23 people when a suicide bomber made his way through two gates and rammed into the entrance of the heavily guarded building in one of the bloodiest attacks targeting the United Nations. The Nigerian Islamist group known as Boko Haram has claimed responsibility, but police say they are considering all possibilities. The UN's security chief has travelled to Nigeria and FBI agents have been in the country following the attack.
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