A Third Scenario For Stock Markets (4)

Historical Stock PricesOne of the most important tools in trading the Philippine Stock Market is a price chart used for technical analysis. Oil production fell off considerably and this destabilized world oil prices considerably which then led to a quick, huge run up in oil prices to their highest levels to that point in history. Because so much production and transportation relies on oil and oil products, their prices were forced to increase for non-economic reasons. It shows the change in the Gross Domestic Product The GDP reflects the cumulative effect of the titanic struggle between the inflationary forces of ever increasing oil prices and the resulting run-up in inflation and the Fed’s effort to curb inflation by turning down the fire underpinning economic activity.

You can easily see one Charts 1 and 2 that both brought on economic chaos followed by negative growth and two recessions. President Carter is out of the picture because the stage was set for the big fall when he took office in 1977. He had no control over the rapid increase in oil prices and the reaction by Paul Volcker. In response, the normal banking industry, Fannie Mae, and Freddie Mac lobbied Congress for relief; they got it in a very big way. It has reached an enormous depth by April 2006; that is when housing prices began turning down and construction starts began reversing three months earlier.

Beginning in late 2006, as knowledge that housing starts had slowed down began to spread, prices first stopped rising at such stupendous rates, then flattened out and finally began to decline in a few parts of the country. Most of the mortgage loans made over the preceding six or seven years were based on a wing and a prayer”, meaning people prayed that home prices would keep going up indefinitely; I actually heard supposedly smart pundits say such idiocies back then, I could only shake my head, because I read and remembered my history.

Even though business was still strong as evidenced by a historically low 4.5% unemployment rate i , pressure was starting to mount on the economy with rising oil prices and home prices had now fallen 4% nationally ii Further, smaller sub-prime lenders started failing and larger ones stopped lending. In 2007 and early 2008 companies like Goldman Sachs, Bear Stearns, Citibank, Bank of America, Merrill Lynch, AIG, and all of the other big names you have heard of were in an internal panic, but publicly were lying their whatever’s off. The lines at the top of the chart are technical analysis lines know as Support-Resistance lines.

The stock market understood what was happening as well S1 Chart xx tracks the Dow 30 Industrial Index through something called an Exchange Traded Fund (ETF) with the exchange symbol of DIA; I trade options in trying to guess whether it will go up or down each month. I present it at this point so that you can see what is happening in the stock market as the Great Recession of 2008 unfolds. From this point until May 2008, the stock market, and America moved sideways, waiting for something to happen.

Historical Stock PricesHistorical Stock Prices