Government Intervention Has a Ripple Effect

By Rick Pendergraft

Over the last month, the intertwined relationships of the markets have been wacky, to say the least. On July 15, the SEC announced its protection plan for Fannie Mae (FNM), Freddie Mac (FRE), and 17 banks and brokerage firms. This move totally disrupted the natural ebb and flow of the market.

Financial stocks bottomed (for now) on that date - which makes sense. But the next part doesn't make sense. Oil peaked on July 15. What does the U.S. government bailing out financial institutions have to do with the oil market?

When the government stepped in to protect those financial stocks, the dollar rallied. Oil is traded in dollars. And much of the rise in oil over the last year can be attributed to the falling dollar. So the rally in the dollar that started on July 15 caused oil prices to drop.

All this being said, it looks like the dollar has too much resistance to get through in the near term. Plus, at this point, oil has too much support at $110 to blast right through that level. Look for a pullback in the dollar and a rally in oil over the coming months.

You shouldn't get overly excited about this manufactured rally in financial stocks, or about the decline in oil. The downward trend for financial stocks is still in place, as is the upward trend for oil. The government may have reversed things for the short-term, but this could be a major opportunity for you to short financial stocks and buy energy stocks.

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