The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Following The Nose

08/03/2016

Long ago, farmers and ranchers learned that the easiest way to control cattle and other large livestock was to put a ring in their nose.  They could then tether the cattle to a particular location or lead them around by simply controlling the ring.

The stock market has always had a ring in its nose.  Since the Global Financial Crisis of 2008/9, the Fed has controlled the ring and the market has faithfully followed the Fed upward.  However, since mid-2015, the oil sector has controlled the ring.  Taking a look at this graph, it appears that oil may be leading the market in the wrong direction again.

Chart of the Day
But  notice the long-term trend-line for oil prices — that area between the red and green lines.  History suggests that oil prices will revert to the mean — that it will come back within the trend-lines, at least above the green lower boundary.  If so, oil will release the nose-ring, and the market will wander aimlessly . . . until something else seizes the ring, like some geopolitical event or some technological breakthrough or some change in corporate tax rates or … ?

More important than who is controlling the ring — is whether the animal is still getting bigger and stronger in the meantime?

Yes, it will !!

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