Crude Oil Hits High for 2009 and Dow Breakout

Well, in case you haven't heard, the herd of bulls seem to be on a stampede at Wall Street: more bluntly, the S&P 500 is now positive year-to-date, the Dow has broken out of a technical stranglehold, and crude oil has hit a new high for the year. I will be using the stampede analogy later.

First, the Dow. Since the 2008 Crash, the Dow has been in a pattern, never rising above a descending line:



However, do you notice that little bump at the end? That was today's close, at over 8400. This is a breakout from the pattern. However, don't metaphorically join the stampede yet. For eight weeks, the stock market has been on an over 30% run, and it has been non-stop, and for that reason, suspect. For comparison let's look at the crude oil chart since the peak in July 2008:



Oil has just hit a new high for 2009, at $54.50 a barrel by the way. You may notice the gradual bottom formation process, first forming a low and then having rallies and pullbacks, while maintaining a general uptrend. If you look at any long-term bottom throughout history, it looks somewhat like that, not a non-stop runup, or a stampede of the bulls.

Stampedes have a reputation for trampling over and destroying everything in their wake. It could prove true in this stampede as well. The wild optimism of stock traders about banks, the economy, and the markets based at best tenuously on real data, could be setting up everyone for a real dissapointment at bad news -- and that bad news is going to come -- and therefore setting the market up for a October-style crash. Alternatively, if the stampeding bulls are right and there is a recovery going on, then this will be number one, a very unusual market recovery, and two, setting us up for very high (probably hyper-) inflation within the next 5 years, because the velocity of money shoots up.

Just delivering a dose of reality to the rabbid runup of bullishness.

This continues our continuing series on the economy and the markets.