There are a few reasons I believe the markets will need a correction sometime fairly soon before they continue their long upside trends. First is my gut instinct that tells me nothing ends in months that was created over years. We've seen a major crash in equities since prices peaked in the 4th quarter of 07, and recently an almost equally impressive resurgence in the markets carrying the DOW up a total of 42% since its March lows. It just seems normal for there to be some sort of correction in the market before we continue much higher.
We've had a lot of good news recently with better-than-expected earnings, especially from the banking sector that seemed to help carry the prices higher. However, if you disect the "good news", you'd realize that we're only about half way through the entire real estate crisis, we still have high unemployment numbers coming in every month, we have seriously curbed consumer spending, and we have not many actual revenue increases. The fundamentals haven't improved at all. Most of the profit increases are only due to cost cutting, and the actual increases we do see come from banks like Goldman Sachs and Meryl who have been awarded massive bailout and stimulus injections. They've had billions of dollars that they've been able to leverage and invest in the rising markets to produce these spectacular earnings reports. I just dont think that the "green shoots" are going to hold out forever, just like a drug addict, at some point there must be a withdrawal even if it isn't a total collapse.
Also, at some point the FED is going to have serious pressure to increase the interest rates in order to soak up all of the liquidity, but I just don't see them being able to do it. Just that alone could be enough to cripple the already teetering financial system. However, If they don't raise the rates we'll be looking at creating another serious bubble and ultimately instigating an irreversible inflation cycle.
Their plan is to let the economy stabilize and then hike the rates to soak up the excess liquidity, but I dont know if the government can really afford to pay the rates if they have to.
Whether the Economy recovers or collapses Oil will be a solid investment because either the demand will increase and supply will be short, or the massive liquidity will drive prices up. Commodities in general should be a good place to invest for the coming years as the Asian and other emerging economies continue their development.
My advice is to buy into Oil Stocks now and continue to average down during any weaknesses. The prices will rise long term based on supply and demand imbalances.
