Tags: oil | Fed | taper | market

America's Worry Should Now Be Oil Prices, Not Tapering

Monday, 26 Aug 2013 07:58 AM

By Sean Hyman

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Right now, the market is caught up in this whole idea of the Federal Reserve tapering its bond-buying program and when they will do it ... September or December.

Keep in mind, that even if the Fed institutes tapering, it's still going to be printing money. They're not stopping what they're doing.

In other words, it's like me driving a car at 70 mph and I ease my foot off the gas pedal to where I'm only doing 55 mph. I've still got my foot on the accelerator and I haven't tapped the brakes yet.

So the taper isn't our biggest worry at this point. In fact, that's been so front and center over the past couple of weeks or so that the large institutions have already factored this in and adjusted their positions accordingly. In other words, it's already a known in the market and it won't come as a big shock to the market once it comes.

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However, what investors are not talking about much right now is oil and where it's heading.

West Texas Intermediate crude oil has been pushing higher lately. It broke through the $98 per barrel resistance and solidly above the $100 per barrel psychological level.

Now it's comfortably hanging out around the $104 to $108 range, and I believe that is soon to be the lows as oil moves on to even higher highs shortly.

In fact, if you were to look on a multi-year chart, there is a 2 ½-year-long downtrend line in oil that was broken once oil rose above the $102 level. If the descending triangle pattern that it broke out of reaches its minimum price target, then we'll see $140 per barrel oil in the months ahead. It could do it in a few months or take a year to get there.

But either way, oil's rise should now be a front and center concern now. Why? History has told us that when oil climbs above the $115 per barrel level and stays there for any real length of time, it's tough on the economy and stock market and that's when we tend to have steep stock market corrections and even stock market crashes.

Remember back in mid-2007 when the Dow Jones Industrial Average was above 14,000 and then it crashed all the way down to below 6,500 in early-2009? That was a 53.6 percent correction in less than two years' time!

What was oil doing when the stock market crash got underway? It was zipping up from $110 per barrel to $148 per barrel. But the beginning of the crash happened long before we got to $148. It happened when oil was in the $110 to $120 per barrel area.

Now, for those who thought that was a fluke and that there was no correlation between that level of oil price and the stock market crash, we got another reminder back in early 2011, when oil reached to just shy of $115 per barrel.

What happened to the stock market then? The Dow fell from just a hair under 13,000 down to just under 10,500 within a mere few months! That's right at a 20 percent correction within those few months!

Well, I'm writing about this to you now because oil is trading around the $106s as of this writing. The $104 to $108 per barrel range should be broken any day now and we'll likely be staring at $112 per barrel sooner than you think, just based off of that range's minimum price target.

That would put us within spitting distance of the danger zone that has come to haunt the stock market. When you combine that with a stock market that's at the high end of its price-earnings (P/E) valuations right now and with a sluggish economy and Fed tapering on the horizon, it doesn't bode well for the stock market in the coming months.

Now, subscribers of the Ultimate Wealth Report and I aren't worried. We're invested in stocks that have P/E valuations that are closer to half of that of the overall market. We've bought quality stocks on the cheap. So we'll be fine.

But the guy or gal who owns a Standard & Poor's 500 index fund or other mutual funds that broadly track the overall stock market will have a rough time if oil keeps rising as I believe it will.

Another way we're hedged from this in the Ultimate Wealth Report is because we own some oil stocks that are benefiting from the rise in oil's price. So our portfolio has actually been helped by oil's rise, but that doesn't mean the overall economy or overall stock market will fare well ... because they won't!

So if you're anywhere near retirement age (within five years of retirement or so), you might consider lightening some of your stock market positions while the stock market is still near the its highest levels ever.

Don't get me wrong. I'm not a "doom and gloomer." If I were, I certainly wouldn't be seeking opportunities in certain stocks. But right now, it's a stock picker's market. That means that those who know how to pick and choose those rare stocks that are undervalued right now will come out on top.

But the average person who owns a lot of mutual funds and index funds, etc., they'll be in a world of hurt if oil continues to rise, especially with a stock market that was led by Fed money printing rather than by a robust economy driving it.

The economy is fragile right now. The Fed knows this. That's why they've supported the market and the economy by printing money. But they may be about to take away their firepower at just the wrong time ... when oil makes its way above $115 per barrel.

If history is our guide, we'll see a major stock market correction heading our way soon. I can't tell you what day or hour. No honest man can. But it could be mere weeks to months away. So prepare now!

God Bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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