Dr. Joe Duarte's Market I.Q.
The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy ForTraders and Investors
Employment Transition Ahead As Housing Boom Busts. Oil &Commodities: China's Oil Reserve. Stocks: Waiting For The Fed.
HousingRepercussions Ahead
Job Collision?
A slowing house market is starting to have a negative effect on the jobs market, creatinganother election issue and adding another counterweight to the U.S. economy.
Yet, according to the Wall Street Journal, jobs lost in the housing sector should bepicked up in other industries that are still growing.
Mixed Feelings
According to the Journal: "tens of thousands of Americans, from bankers tohardware-store clerks, are likely to find themselves out of work over the next couple ofyears. For those who can transfer their skills to other industries that are still growing,such as health care, it won't be the end of the world."
The news is already starting to break: "Last week, KB Home, of Los Angeles, one ofthe nation's largest home builders, said it had laid off about 7% of its 6,600 workers.Earlier, ACC Capital Holdings Corp., the parent of mortgage lender Ameriquest MortgageCo., announced plans to lay off 3,800 workers. And Washington Mutual said it would becutting 2,500 jobs related to its home-loan business."
Still, the transition could be significant, at least for some time, as a broad crosssection of Americans including "architects, contractors, real-estate agents, brokersand bankers, as well as the host of others who provide the industry with materials andservices," could be at least temporarily unemployed.
In fact, according to Moody's some 23% of the jobs created since 2003 are housing industryrelated.
There are likely to be other sectors affected as well. As the Journal points out "Asstagnating house prices and higher interest rates limit Americans' ability to use theirhomes as a source of cash, they are likely to spend less money on consumer goods, meaningless work for all kinds of folks, from assembly-line workers to shop assistants."
What The Economy Needs?
Interestingly, some are saying that this is a good thing for the economy. According to theJournal: "From a macroeconomic perspective, the housing slowdown, and the attendantslowing of job growth, could be just what the economy needs. If, as some economistspredict, the monthly average rate of growth in U.S. non-farm payrolls falls and stays abit below 130,000 -- from about 175,000 in the first quarter -- that would help keep wagesin check, relieving the inflationary pressures that have worried Federal Reserve officialsand, as a result, spooked financial markets. "That's exactly what the Fed would liketo see," says Mark Zandi, chief economist at Economy.com."
Others are suggesting that job losses in one industry will be made up by gains in othersectors, although history shows that some of these transitions can be quite rocky."Industries that have picked up the pace of hiring in recent months include healthcare, finance (excluding housing-related finance), education and nonresidentialconstruction. Manufacturing, too, is benefiting from increased capital investment in theU.S. and abroad: The sector has added 134,000 production jobs since September."
The key is whether the economy is expanding or contracting.
As always, one of the great influences on any individual will be what part of the foodchain they fit into.
Here's an interesting observation, though: "Immigrants who specialize in low-skilltasks could be among the hardest hit."
Conclusion
The housing industry is starting to respond to a slowing in its growth by laying offworkers. Construction and lending are the early victims, but expectations are for othersectors to follow.
Housing is among the most interest rate sensitive industries, since building, mortgaging,and contracting are all dependent on the availiability of and the ease of obtainingcredit.
Consumers have extended the current economic boom based on low interest rates, and theability to borrow against their homes.
But, the only real outcome of the borrowing binge has been an increase in consumer debt,to record levels, and the postponement of the eventual payday, the reality check.
Anyone with decent credit gets daily offers from credit card companies for low rate orzero finance credit cards.
Recently, we saw a credit card company offer that allowed not just the opportunity to missa payment once in a while, but to actually structure payments every other month.
In other words, banks are now starting to compete fiercely for a fixed pool of borrowers.The borrowers are increasingly dependent on zero interest credit cards as a way tocounteract the effects of higher debt loads from multiple mortgages.
Unemployment, at least temporarily looks ready to start rising.
And the Federal Reserve will likely continue to raise interest rates.
To us, it sounds as if more trouble is on the way.
Oil And Commodity Summary:
China Strategic Supply Could Boost Prices
China's strategic oil supply move, to be filled through a direct deal with Saudi Arabia,is likely to keep prices stable, although it's not expected to start drawing Saudi oil forat least several months.
Still, it's likely to provide steady demand, and from the Saudi standpoit, barring achange of mind for the Chinese, highly unlikely, it's an insurance policy against a globaleconomic slowing.
According to multiple reports, the proposed reserve will aim to have 700 million barrels,making it larger than the current U.S. stock pile, which is officially filled, with justbelow 600 million barrels.
According to Marketwatch.com: "With worldwide oil use at around 84 million barrelsper day and 1.5 billion barrels available for emergencies, the world has about 18 daysworth of emergency oil at its disposal. "
Overnight, crude oil was agin above the $70 area, while natural gas was pulling back.
Chart Courtesy of StockCharts.com
The Wilderhill Clean Energy Index remained above its 200 day moving average, but is stillsome 20% off of its recent highs.
Chart Courtesy of StockCharts.com
The Philadelphia Oil Service Index (OSX) is also testing its 200 day moving average.
Chart Courtesy of StockCharts.com
The Amex Oil Index (XOI) rallied last week on takeover news, but still has resistance at1100.
Technical Summary:
<!------ CHART -- spx ---->
Chart Courtesy of StockCharts.com
Waiting For The Fed
Stocks are likely to move sideways until Thursday afternoon, when the Federal Reservemakes its announcement on interest rates.
What happens after that is anyone's guess, as the market is oversold, but not necessarilyout of the woods, if the Fed says, or does something unexpected.
What the market expects is a quarter percent hike on the Fed Funds rate. What some on thefringe are saying is that the Fed could raise rates by 0.5%.
That would be unexpected, and could be an negative, if the Fed does not accompany theincrease with a note that it plans to pause its relentless increase of rates.
There are a myriad of possibilities. And any new word uttered in the statement, or anyperceived nuance could be a market mover.
As a result, we expect little movement from the market until the Fed actually makes itsmove.
The S & P 500, despite all the hoopla has remained below the 1245-1260 area, while theNasdaq failed to close even above 2150, although it flirted with the area on an intradaybasis.
So, it is still no time to be particularly bold about making bets on the long side, or onthe short side either.
But, it is a good time to be making a shopping list. See our individual sections, as we'veadded some potential longs.
Commodities Stabilize
Commodities have stabilized as rumors of hedge fund problems have come and gone.
Crude oil has been trading just above the $65-70 trading band.
Gold remained below the $600 area. The real key is what happens at $600 on the up side,and $550 on the down side.
Check our energy section for bond, gold, dollar, and currency recommendations.
What To Do Now
Traders should make that shopping list, and start building strong positions inexceptionally strong stocks, with the understanding that the rally could fizzle and thatyou might get caught with small losses.
Investors should stay on the sidelines and wait for confirmation of a sustainable trend.Raise cash. Build a shopping list. Be patient.
Our ETF trading systems have been adjusted accordingly. The Fallen Angels have newrecommendations as well.
Remember, our Fallen Angels portfolio is designed for those with a longer term time frame,and offers both long and short recommendations.
Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems forthe latest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, andtechnology have also been updated.
Chart Courtesy of StockCharts.com
Sentiment Summary:
Duarte Gauge Falls To Zero
Our proprietary market oversold, overbought gauge, the Duarte Overbought-Oversold Indexfell to zero, while put/call ratios rose once again. Normally, this combination would bebullish for the markets.
Healthy advances tend to rise on the back of worry warts who buy put options when themarket falls. But, as the bear market that ended in 2003 showed over and over again,rising put/call ratios are not enough, in and of themselves, to keep a bull market going.When the market falls and put option buyers are absent, it is often a sign that moreselling is coming.
The CBOE Put/Call ratio checked in at 1.00 on 6-23. A consistent string of low readingscan be a sign of excessive optimism and often signals a top in the markets. Readings below0.5 are of concern, but not as serious as readings below 0.40. Readings above 1.0 arebullish. The numbers cited here are meant to be evaluated on a closing basis.
The CBOE P/C ratio for indexes checked in at 1.98. Numbers above 2.0 as the market sellsoff, often lead to rallies. Readings below 0.9 suggest too much bullish sentiment, just asreadings above 2 are usually required to mark major bottoms.
The VIX and VXN had readings of 15.89 and 20.36, both stabilizing. A fall near or below 20on VIX and 30-40 on VXN is considered negative, a fact that is usually confirmed when thevolatility indexes begin to rise. Readings above 40 and 50, respectively, are often signsthat a bottom may be close to developing.
The Duarte Overbought-Oversold index fell to zero from last week's 25%, giving another buysignal, its fourth in a row. This is getting a little more weight now. But still, use thissignal with caution, as durin g a bear market, these signals are usually wrong. Readingsof 80 are overbought and 40 and below are oversold.
NYSE insiders were sellers of stocks for the week of 6-2-06. NYSE insider short sales arestill at very low levels. When NYSE specialists raise their short sales, and sell stocks,risk increases dramatically. There is a two week lag for these figures.
Market Vane's Bullish Consensus rose to 59% on on 6-23-06, falling but remaining neutralafter several consecutive sell signal levels. This indicator has been calling for apullback in stocks for several weeks. Buy signals occurr when the indicator falls to 40%or less.
MarketMoves
Chicago Merc Near Key Test
Shares of the Chicago Mercantile Exchange (NYSE: CME) look ready for another try at the$500 area as the Gold ETF (NYSE: GLD), and the U.S. Oil Trust (AMEX: USO) are starting toform bases.
Chart Courtesy of StockCharts.com
Just as the Fed looks ready to raise interest rates once again, shares of the Chicago Mercare looking ready to test their all time highs once again.
We'll be watching shares of CME as Thursday gets closer. If CME starts to weaken, it couldbe a sign that the smart money is starting to get cold feet about the commodity bullmarket.
If CME continues to rally, the key is what it will do at the $500 area. If the Fed raisesrates, and CME continues to rally, as well as taking out the $500 area, we could bewitnessing a major bet that the commodity bull market is nowhere near its end.
Also watch the action in GLD and USO, tow key exchange traded funds that have started toform a base lately.
Rallies there, should be accompanied by rallies in CME.
Chart Courtesy of StockCharts.com
The Amex Biotech Index (BTK) may be a source of relative strength if a market rally canshow some staying power.
Chart Courtesy of StockCharts.com
The Amex Pharmaceuticals Index (DRG) is still in no man's land.
Chart Courtesy of StockCharts.com
The Philadelphia Semiconductor Index (SOX) is trying to bottom. The next few days arelikely to be crucial.
Chart Courtesy of StockCharts.com
Small stocks are groping for a bottom, but are not likely to go against the overall trendin the market.
© Copyright 1996-2006, Kollar Market Analytics, Inc., All Rights Reserved.
Disclaimer: The financial markets are risky. Investing is risky. Past performance does notguarantee future performance. The foregoing has been prepared solely for informationalpurposes and is not a solicitation, or an offer to buy or sell any security. Opinions arebased on historical research and data believed reliable, but there is no guarantee thatfuture results will be profitable.
