As always when the markets get confusing I go to the weekly charts to get a better idea of what's really happening. Yesterday I noted that the S&P had broken the trend line from the Mar. lows. By looking at the weekly charts it becomes apparent that the market rallied back to the 75 week moving average that acted as support during the bull market. As of last week it is now acting as resistance.
The Transports have been much stronger than the rest of the market despite high oil prices but looking at a weekly chart (or daily for that matter) the 2b reversal becomes very apparent.
I know the argument that if oil backs off it will rescue the market and the economy. I'm just not sure I buy it. The damage has already been done. Oil will back off during a recession because demand will drop. I think the Fed's liquidity pump over the last 5 months just made sure oil went to $135 instead of $100.
Economies don't turn on a dime. Just because oil is backing off it doesn't mean the economy is all of a sudden going to rebound strongly. As the economy continues to sink from the duel effect of the real estate bubble bursting and energy spiking the stock market will likely again try to price in the recession. I still don't buy the whole market discounting theory. The market wasn't discounting anything over the last two months other than the fact that the Fed created a lot of paper. At some point the market will wake up to the fact that the economy is faltering and there likely won't be a quick rebound no matter how much money the Fed throws at it.
When it does I fully expect Bernanke to again turn on the money spigots. If he does he may keep the market from falling below the Mar. lows but he will also just continue to stoke the fires of inflation.
I'll be watching oil closely during this period. If it bottoms around $100/$110 and then heads north again I think 09 could be a very rough year.