Some people say that the sea is the calmest just before a storm. Just ask any seasoned fisherman and they will tell you that it is true.

The local bourse is quiet, very quiet, by recent standards where trading volumes have been ranging from one to two billion shares a day. However, if we were to compare such volumes to trading activities six to seven years ago, stockbrokers will tell you that this is still boom time because trading volumes at the aftermath of the September 11 incident ranged anything from 100 to 200 million shares on an average day.

Are we heading back to those days? Investors are still pretty much divided on whether we are heading for a prolonged bear market. Nobody knows the answer. I do not have the answer because I am still waiting, like I said on numerous occasions, for the US Federal Reserve rate cuts to nurse the US economy back on the recovery path.

The first quarter gross domestic product did not tank as expected but all other economic indicators just announced do not bode well for the second quarter. While these sub-par economic performances could be more lagging in nature, we are still faced with falling housing prices. I have indicated previously that the housing prices must stop falling in order for the banks to stop writing down the values of their mortgage assets. This, in my opinion, is the key to an economic recovery apart from continued strength in the US employment scene.

No More Rate Cuts
Lately, Fed Chairman Ben Bernanke has hinted that the Fed will probably stop cutting rates as they have done enough to promote moderate economic growth. He also added that a weak US Dollar will have the effect of feeding into inflation.

From the looks of it, he would have continued to cut Fed funds rate from the current 2% to a probable 1% if not for the fact that inflation has come out tops on his list of worries.

Apart from high energy prices, which will fuel inflation, a weak dollar, which makes imports even more expensive, will also add on to inflationary pressures as goods become dearer to US consumers. As such, the Fed needs now to address the problem of inflation by putting an end to rate cuts hoping that it will stop investors from dumping the Greenback.

Most importantly, putting an end to the rate cuts will, in my own thoughts, serve to inform the world that the Fed is now pretty sure that the rate cuts will possibly work. It is an important show of confidence to the world that its policies have helped to stabilize the financial markets and economy.

In all honesty, the US economy may not start to recover strongly but it should at least be in a period of moderate growth for the foreseeable future.

It is time to fight inflation, which has all along been worrying the Fed, now that they have done their part in rescuing the economy and the financial markets. Data showing inflationary pressures have so far been benign, which means that there is no real danger of inflation going out of hand.

One real worry is that high oil prices, plus the fact that food prices have skyrocketed, will cause hyperinflation and lead to social unrests globally.

Governments Likely To Step In
We now know that the US government has stepped in to investigate manipulation in the oil futures markets. We have seen oil prices correct from its high of about US$135 per barrel to around US$125 per barrel.

We also know that palm oil prices, corn prices, steel prices and food prices have all skyrocketed. We have heard even from George Soros that commodity prices are likely to come down soon, which means the bursting of another bubble. If such a bubble does burst, I believe that some “cowboy” organization will get hit upside down, especially by a collapse in oil prices, should that ever happen, leading to insolvencies.

If oil and food prices do not come down, the bubble will get bigger and inflation could get out of hand. In betraying the free market principle, I believe that governments all over the world could soon step in, rather reluctantly, to address the problem. Whether such a concerted effort will work is anybody’s guess.

When that starts to happen, I will be the first to dump oil and oil-related stocks as well as palm oil stocks that I continue to like even up till now.

Technical Pictures
The technical picture for the Dow Jones Industrial Average (DJIA) has deteriorated since the last issue when I painted an optimistic picture.

The DJIA has once again failed to stay above 12,800, which means that a head and shoulders formation is in the process of completion, with the left shoulders formed in February and March and the heads formed when the DJIA went to 13,150 twice – once on May 2 and then again on May 19. The first right shoulder has been formed and the neckline support should help the DJIA stay above 12,270.

A rally from now on which sees the DJIA going back to 13,150 will negate this head and shoulders formation.

As for the STI, it is performing far better than its US counterpart after being locked in a tight 100-point range and showing resilience despite correction in the US market.

I will start to turn bullish if the STI heads above 3,250 but a break below 3,100 and 3,050 will open up more downside.