A messy market calls for discipline

• Sell 100 shares of ITT Educational Services (ESI, news, msgs) at a stop of $82.50 at the open

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It is a mess out there. Tremendous confusion on top of frustration added to fear. It has apparently become a confidence drain, and now it appears that investors are walking in circles waiting for whatever appears as the "news du jour."

You can't blame anyone for wondering what is going on as we have seen crude oil prices go from $147 to $117 in a matter of weeks. If you think about it, it's kind of funny that the meteoric rise was attributed to a lack of supply due to a huge spike in demand. Just like that, the world demand has abated.

Hurricanes, wars, politics and emerging markets have all been blamed for what happened, but the real story about the speculation formed out of regulatory oversight has been underreported and misunderstood. I exhausted the discussion regarding the Enron loophole in my last journal entry, but it is a good idea if you listen to my conversation with University of Maryland professor Michael Greenberger, who deserves all of our thanks for taking on members of Congress to educate them and open their eyes.

Where does oil go from here? If you are strictly a chartist, the move to support at $98.50 would bring it to a level that is still 40% greater than its price in August 2007, when it started its upward ride. If you use Fibonacci regression (doesn't everyone?), the price could fall toward its 38% retracement point of approximately $115 before it makes another directional move.

The religion of the bull

It is rather astonishing that there are people who still believe that we are in an economic environment that is actually growing. The fact is that we are seeing a general economic slowdown; earnings across many industries are falling, causing a groundswell of apprehension toward stocks.

Comparative earnings for the S&P 500 sectors for the second quarter of 2007 and the same quarter this year:

Winners

Energy +25%

Technology +15%

Health care +8%

Industrials +5%

Consumer staples +5%

Utilities +4%

Losers

Telecommunications -2 %

Materials -3%

Consumer discretionary -24%

Financials -85%

Sure, there was that 330-point day recently when the Fed held interest rates steady, but that does not alter the fact that nothing has changed. There is still a colossal problem in the financial sector as we see Morgan Stanley (MS, news, msgs) close home-equity line of credit account withdrawals. And Citibank (C, news, msgs) may have to pony up $8 billion to states, accused of fraud with regard to auction-rate security sales. Unfortunately, the list of problems goes on and on.

Then and now

The difference between this and the 2000-02 drop is that there was plenty of liquidity then as opposed to now. Back then, banks were still able to provide funding to the U.S. consumer and help businesses build for tomorrow. That has all but stopped.

Continued: Real estate troubles

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