Are we having fun yet?

"Never, ever underestimate the importance of having fun."

I'm going to keep having fun every day I have left because there is no other way of life.  You just have to decide whether you are an Eyore or a Tigger." - both quotes by Randy Pausch

I have to say the last few weeks have been interesting to say the least but it has been nice to see a lot of green on my screens for a change.  That said it does feel as if the market is working off some steam rather than capitulating.  Gold has barely budged off its lows and the VIX, while up significantly from 12 to 23, is hardly showing signs of panic.  Looking back through history when true panic hits the streets the VIX can spike to well over 50 so while it is slightly elevated it is not signalling any kind of panic.  Even so the broader Russell 2000 index is already into bear territory being down more than 20% from its highs in June 2015.  This index often leads the others both up and down so it is interesting that it has been in a downward spiral while its large cap brethrens are more than 7% higher and holding onto "just" a correction. 

It is interesting that the market seems to be trading in tandem with the price of oil and certainly the press has latched onto this as the main culprit for the draw down but I ask you, what is the correlation between a low oil price and a technology company?  It is certainly loose at best and non existent normally, so what the market must be sensing is that the weakness in oil is more about a lack of demand rather than a glut of supply.  This would indicate that the world economy is weaker than anticipated which would feed into technology earnings and therefore impact the stocks.  That said in the commodity world there is a wonderful saying that low prices end low prices and high prices end high prices.  This will be true of the oil price as at some point the price will be so low that producers will close down slowing the supply while consumers will be ramping up the purchase of large fuel guzzling trucks and the price will swing to the upside.  This day however I feel is some way off.

According to the oil industry estimates, the glut of crude will be here for at least another 12 months and that is based on some pretty rosy projections by the IMF for global growth in 2016.  While the IMF has already cut its global growth forecast by 10% to 3.4% (and we are only in January) I suspect that there are more cuts to come and that we could end the year with global growth well off this number.  In this scenario of weakening global growth it would appear that any short term market rally is an opportunity to sell your remaining positions rather than a signal that the good times are back.

There is one caveat though and that is the Federal Reserve.  While they are almost forced to sit on the sidelines at present, if the market falls apart they will step in and that could be a short term buying opportunity.  I say short term because at some point the market will wake up to the fact that their efforts are not repairing any of the world's economic problems but are creating a larger ones.  The sad part is that they have managed to export their poor economic solutions to the rest of the world and that is the real problem!

At present though it looks like we may escape a recession which would mean a relatively short sharp draw down in stocks to a level more commensurate with the economic outlook and current company earnings forecasts.  This level though is still at a minimum another 20% from here so I would expect more pain ahead in the coming weeks and months.