Rally Petering Out?

For the week, stocks staged a fairly healthy rally, with Wednesday and Thursday each producing 200+ point gains on the Dow as positive earnings - especially from companies in the finance sector - and a big drop in the price of oil helped stocks regain some of their lost ground.

Friday was more of an up-and-down affair. While techs slumped, a late-day mini-rally pushed the Dow, S&P and NYSE Composite into positive territory for good.

Dow 11,496.57 +49.91; NASDAQ 2,282.78 -29.52; S&P 500 1,260.68 +0.36; NYSE Composite 8,453.85 Up 38.80

Volume on the exchanges was light compared to the last two days, a sure sign that investors have established their positions and will wait for cues from the market. Next week is the height of earnings season, with much of the S&P 500 and many Dow stocks reporting.

For the week, the Dow ended 396 points higher, the S&P tacked on gains of 21 points, the NYSE added 106 and the NASDAQ pushed ahead 43.

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Internals were a close call on the advance-decline line, with losers narrowly beating gainers, 3193-3072. New lows continued to outpace new highs, 235-90, a reading nearly identical to yesterday's.

Oil dipped 71 cents, to close at $129.47, the lowest close in months. The metals confirmed once again, with gold down $12.70, to $958.00, and silver off 54 cents to $18.20.

The continued sluggishness in the commodities suggest the coming of a new threat, that of slack demand, which can only push prices lower. Considering the heights that prices have reached in recent months, this should come as no surprise. In the case of oil, especially, the need to purchase fuel of all kinds has caused a backlash in the markets, and they are rapidly unwinding.

A sharp decline in commodity prices is going to cause assorted problems across the supply spectrum. No sooner have companies adjusted upwards, prices will have to reverse course. Naturally, some will respond sooner than others, but the entire world's commercial system is now in a state of flux and expectation. Without price stability - a stated goal of the Federal Reserve and other central banks - markets will gyrate wildly, with no established reference points.

All of this is troublesome, and a precursor to global recession. The handwriting is clearly on the commodity exchange wall. The coming storm is likely to be neither short in duration nor easily constrained. The best one can hope for is a modicum of sanity in markets, though even that may be a stretch.

As the continued credit crisis unfolds, it gets more and more interesting, but also vexing and potentially deadly to commerce everywhere.

As a medium to long-term strategy, keep focused on prices for all goods, materials and services to decline, including stocks, but especially commodities. It will take time and a healthy dose of skill for companies to adjust to rapid price changes in the marketplace. Some will crack under the burden, while a select few will benefit handsomely.

NYSE Volume 1,587,686,000
NASDAQ Volume 2,259,207,000