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The "Shock And Awe" market decline

Agriculture.com Staff 11/19/2008 @ 2:14pm

"Shock and Awe" was a phrase coined during the Iraq war for the firepower and accuracy displayed by the US military in that war that was debilitating to the spirits of the fighting enemy.

The past five month market decline in stocks, commodities, and almost everything of value, deserves about the same term as it has been devastating to any bulls in the marketplace. The "shock and awe" bear market has debilitated bulls to the point that no one can see any possibility of a market rally. Are market bears practicing "shock and awe"?

In spite of heavy losses in energy futures (which normally is considered good for the US economy), so far the heavy losses in energy haven't given much support at all to stock markets. While the whole world is looking negatively at all the recent developments, it's a wonder how much attitudes have changed around the world. Are those new attitudes correct? Or will another sea change take place in another four months (as it has recently)? This is a very important question for the marketplace, and one that is also very difficult to answer.

While the speed of the recent decline could meet the definition of 'awe', the change has been so dynamic that one wonders about the reality of the negative attitude today. Is it much different than the bullish atmosphere in July when corn was $8, soybeans $16, and wheat $10-$13? We seemed to be so bullish then, but that bullish attitude turned out to be completely wrong - a mirage so to speak. Prices really weren't at sustainable levels at the time, but yet the 'average Joe' was probably bullish there, not bearish. So much had been made of the two-year commodity price rally that we couldn't see a possibility of a price decline. The point is, people can be fooled into being far too optimistic - a point that cannot be argued today. So therefore, can it be possible that we get too negative as well? In fact, given the speed of the recent decline, it's likely we will take prices much too low in the near term than fundamentals will justify. Momentum has a way of pushing prices too high on the upside, and too low on the downside. The faster they move, the more distorted it seems they can get.

We have seemed to stabilize the current price picture, with the Dow relatively stable at 8,000 and above. The first point in ending the 'shock and awe' bear market is stability. Are we there yet?

Recognizing the possibility of change is important, but so far some semblance of reality has to set in. Prices can't possibly continue to drop at the current pace, or in 5 months they will be worth nothing! Instead, its likely the losses will slowly abate, and then we might actually see a small rally. Once the selloff is over, we might even be able to rally the market a substantial amount

. So far, Pro Ag has been waiting quietly for the market to indicate some type of bottom. So far, we don't have any confirmation of a bottom in commodity prices. How close we are to a bottom is unclear. The time passing between now and that buy signal could be one week, or even up to one year. But as quickly as we've depreciated commodity assets, it seems more likely the bottom will occur in a relatively quick time period.

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