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Warily watching the price of oil

The North American markets seem to move higher each month even as the world struggles with many economic and political issues.

The North American markets seem to move higher each month even as the world struggles with many economic and political issues. The broader market continues to show its resiliency in the face of natural disasters, wars, debt issues and higher inflation. The commodities sector, materials and oil have been the main drivers taking this market a lot higher. How high can oil, gold, silver and commodities go? There are many analysts and advisors who believe all of these sectors can still rise a lot higher in the near term. However most individuals are concerned that at some point in the not too distant future, there may be a rather large pullback in these areas, so the question becomes how will this affect the stock market?

I have written quite often about the bull market I see before us in North America, a market I see continuing to move higher based on the current fundamentals of the economy. However, even I am growing a little concerned with the recent rise in the price of oil, gold and silver. It seems like these areas are really the only areas of the broader market carrying us to the new highs we have been experiencing. Even the once high flying tech sector has not been performing too well as of late. Thus, if we are to see a pullback in the price of oil and or in the price of base and precious metals, how would the Canadian and U.S. stock markets react?

With leadership in this market being so narrowly focused, I am concerned about the short term negative issues a pullback in these areas may cause. Make no mistake, the price of oil cannot, and in my opinion, will not go up forever. Back in 2008, many believed the price of oil would reach $200 per barrel only to see prices crumble to less than $70 by year-end. Fundamentally, I believe the price of oil is currently inflated by roughly $15 to $20 a barrel. Oil inventories in the U.S. and around the world are high, so why is the price per barrel rising? In my opinion, much of the rise is due to the political unrest in the Middle East and oil speculators are using the events in that region as justification to take the price higher. Once those issues begin to settle down, it is my belief the price of oil will fall and fall fast.

I still believe this market will move higher this year. I anticipate a 10 to 12 per cent rise. Thus, even though the leadership in the stock market is quite narrow and this makes me concerned in the short term, over the longer term for the rest of the year, I see a continuation of the current bull market run. I anticipate at some point that other sectors of the market will join in this market rally. Sectors such as, financials, healthcare and technology will pick up the slack for falling commodities and oil sectors. If I am correct, this market will finish 2011 on a high note providing investors with great returns once again.

Thus, if you are investing your money into the market today, I recommend staying diversified. Do not chase the hot sectors only. Have some exposure to the oil, base and precious metals sectors to take advantage of the momentum in those areas, but always stay diversified. Individuals should continue to the look for companies that are leaders in their respective areas, companies that pay dividends and if possible, ones that are inexpensive. There are still many companies in each sector (even in commodities and oil), that fit this description. Stick with these types of investments and I think the performance of your portfolio will be terrific in the coming months.

If you have any questions regarding the above article or are looking for an investment adviser to help you with your portfolio, please visit my website at www.investmentadvisorgta.com. I will be glad to speak with you!

Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.

 
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