Sell Into the Coming Rally

Yesterday, the Bush Administration displayed a show of force with Treasury Secretary Hank Paulson, Federal Reserve Board Chairman Ben Bernanke, and a presser and Q&A, by George Bush with the White House reporters.

The intent was to calm domestic markets after a worldwide sell off preceding the opening of the US markets, Tuesday morning. As they fanned across the news networks, just as markets opened; the DJIA started the morning with a triple digit decline. It worked; the Dow closed down 64 points.

The financial markets were very fragile going into this week after the F.D.I.C.’s takeover of IndyMac Bancorp Inc., late last Friday, and there was an emergency meeting held Sunday by the Feds promising to ask congress for increase in the current line of credit for Fannie Mae and Freddie Mac, both are Government Sponsored Enterprises (GSE), and to stand behind their debt. They are the lynchpins of the US housing industry and are also the lynchpin of our economic system at this precarious time.

High tension in the Middle East is producing an inflated petroleum price to go even higher. This also is causing more destabilization in world financial markets. It was reported Tuesday night Undersecretary of State, William J. Burns, the third-ranking official in the US State Department will be meeting this Sunday in Geneva, Switzerland for scheduled international talks, with a negotiator from Iran, about their nuclear program. Burns will not meet alone and will not negotiate with the representative. However, this would add a calming influence on international oil markets.

By meeting with the Iranian government, this act of diplomacy should alleviate pressures on the oil market and prices.

Oil prices dropped $6.44per barrel, to $138.74 a barrel, Tuesday. Option contracts on oil are expiring this week and Futures contracts next week, therefore, cash market pricing will supersede speculation, short term, and speculators will move to the sideline. Earnings are reported beginning this week and they most always lend an upside bias to the market. This will probably be an excellent opportunity to sell into a short term rally, in equities, over the next five days.

Again, we should see less pressure on the price of oil, because of the administration show of force in addressing Fannie and Freddie, the meeting with Iranian officials, and the expiration of oil options and futures contracts should bring the price of oil down and allow the stock market to rally, for now.