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Dr. Joe Duarte's Market I.Q. 10/18/5


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Posted 18 October 2005 - 01:43 PM


Dr. Joe Duarte's Market I.Q.
The Internet's Intelligence Digest
Intelligence, Market Timing, AndTrading Strategy For Traders and Investors

Greenspan: New Paradigm Speech BoostsDollar Knocks Oil. Oil: Alternative Energy To The Forefront. Stocks: Stuck In The Mud DueTo Uncertainty.
by Dr. Joe Duarte,

Dallas, TX, October 18, 2005,   08:00EST

Fed Chairman Alan Greenspan may have started something in a speech overnight. His remarksabout energy and the effects of higher prices on the future of the global economy arelikely to spread in the next few days.

Starting Points

Special Council Trouble For White House Nears Boiling Point

Vice President Dick Cheney’s role in the CIA agent leak case is being probed.According to Bloomberg: the special counsel is “focusing on whether Vice PresidentDick Cheney played a role in leaking classified CIA information, according to peoplefamiliar with the probe that already threatens top White House aides Karl Rove and LewisLibby. The special counsel, Patrick Fitzgerald, has questioned current and formerofficials of President George W. Bush's administration about whether Cheney was involvedin an effort to discredit the agent's husband, Iraq war critic and former U.S. diplomatJoseph Wilson, according to the people.”

A decision to bring charges against key members of the Bush administration could be near.According to MSNBC: “Fitzgerald could decide within days whether to bring chargesover the leak of CIA operative Valerie Plame’s identity. Cheney’s chief ofstaff, Lewis Libby, and President Bush’s top political adviser, Karl Rove, were amongthe possible targets, legal sources said. Citing legal and Bush administration sourcesfamiliar with the thinking, Time magazine reported Sunday that Libby and Rove have madeplans to step aside or resign if they are indicted.”

Refco Disintegrates

Just one week after the scandal hit the wires, Refco is essentially a non entity, as thecompany has reportedly sold its regulated futures arm to a hedge fund for $768 millionwhile the rest of the company declares bankruptcy.

According to the Wall Street Journal: “Refco Inc. said an investment consortium ledby private-equity fund J.C. Flowers & Co. LLC reached an agreement late last night toacquire Refco's key regulated futures-trading unit as the brokerage firm filed forbankruptcy-court protection. The bankruptcy filing was set late last night as Refcoscrambled to stanch an outflow of customer assets. The investment group led by J.C.Flowers also includes Texas Pacific Group, another large private-equity fund, a personfamiliar with the matter said.”

Today’s Analysis: Greenspan’s Motives Are Beyond The Obvious

Fed Chairman Alan Greenspan once again stated the obvious, high oil prices will be “adrag” on the global economy. And while the markets moved on the remarks,Greenspan’s motives go beyond the obvious, as the Fed Chief’s motives are deeplyrooted in his firm belief in free markets and competition.

According to the Wall Street Journal, Greenspan, in a speech in Tokyo told a group ofJapanese businessmen, that high oil prices will hasten a move toward alternative energy.The Chairman, added: "Although the global economic expansion appears to have been ona reasonably firm path through the summer months, the recent surge in energy prices willundoubtedly be a drag from now on.”

The mainstream media reported the remarks as just another speech, and surprisingly ignoredthe effect that it had on the markets, a strengthening of the dollar, and a big fall inoil, gasoline, and natural gas prices.

But a close look at Greenspan’s remarks, reveal a rather concise and significantagenda.


The Big Switch

Greenspan left no nuance, and had no hedging in his remarks. Unless we’re missingsomething, he told the group that high oil prices have tipped the balance of the globalenergy equation “from now on,” which until proven otherwise means forever. Inother words, Greenspan has proclaimed that this is a new era. This is really big news.

What makes the remarks interesting, is that Greenspan continued to push his central tenetforward, that high oil prices, and their negative effects, won’t stop the Fed fromraising interest rates. According to the Journal, the Fed chief added: [“But becausethe world uses only two-thirds as much oil per unit of gross domestic product as it didthree decades ago, "the effect of the current surge in oil prices, though noticeable,is likely to prove significantly less consequential to economic growth and inflation thanthe surge in the 1970s," he said.]

Greenspan is betting that the markets are making the correct adjustments to the situation,noting “that after oil prices plunged in 1985, the decline in U.S. energy intensity-- that is, the amount of energy consumed for every dollar of GDP -- slowed sharply. Withoil prices on the rise, ["more-rapid decreases in the intensity of energy use in theyears ahead seem virtually inevitable," he said. That might already be under way, hesaid, noting that "gasoline consumption has declined markedly in the United States inrecent weeks."]”

Don’t Worry.. Be Happy..

Donning an impish grin, Mr. Greenspan donned his long term forecasting robes, no pointedhat was visible, and noted: ["If history is any guide, oil will eventually beovertaken by less-costly alternatives well before conventional oil reserves run out ... .We will begin the transition to the next major sources of energy, perhaps beforemidcentury."] He noted that this will probably happen while there is still plenty ofoil around: ["Oil displaced coal despite still vast untapped reserves of coal, andcoal displaced wood without denuding our forest lands."]

Always a ray of sunshine, Greenspan noted: “that the transition will take time andthat the rapid growth in China's economy, which is much more energy intensive than that ofthe U.S., will slow progress. The world, he said, ["will have to live with thegeopolitical and other uncertainties of the oil markets for some time to come."]

Conclusion

Greenspan’s planting the seeds of where he’d like the Fed to go after he leaves.Taking a page from the Rubin years, Greenspan, without openly clamoring for it, is pushingthe dollar higher, while slowly using his last few weeks as a major market mover toattempt one more soft landing.

So far, the parallels to earlier periods of major problems in the history of the U.S. havebeen miraculously weathered.

The war in Iraq, has hurt the U.S., and has brought President Bush to the brink offailure. The inevitable second term scandals in the White House are moving full steamahead, with high level aides in Bush and Cheney’s chain of command facing indictment,while the White House chief of procurement David Safavian has already been indicted onfive counts of obstructing an investigation into his dealings with lobbyist Jack Abramoffand has pleaded not guilty to the five counts pending against him.

The Republican leadership in both houses of Congress, Senator Bill Frist, andRepresentative Tom DeLay are in legal trouble, the former being investigated for possibleinsider trading on HCA Corp. stock, while the latter has been indicted.

But the economy, despite these major political hits, such as GM’s woes, several majorhurricane hits, and the implosion of Refco, a major player in the futures market continuesto hold up.

Bottom line: Greenspan is a deficit hawk and a huge proponent of the free markets, and hehas three major goals.

First, he’d like to repatriate the dollars that went to China after 9/11. This wouldaccomplish a rise in the dollar, as money moves back to the U.S., and would keepChina’s growth in check, while continuing to finance what he hopes will be adecreasing budget deficit.

And second, by talking tough, he’s hoping to keep the increasingly out of controlpolitical shenanigans in Washington from derailing the U.S. economy.

By simultaneously pointing out that high oil prices are a drag on the global economy, butstealthily pointing out that the U.S. economy is highly efficient at using theincreasingly expensive oil, Greenspan is creating the impression that he can continue toraise interest rates, in effect making the U.S. look like a haven in comparison to therest of the world. In other words, in a world of nuance, relativity, and infinite shadesof gray, Mr. Greenspan is doing what Mr. Bush and his increasingly hapless supporting castcan’t seem to do, to make America a money magnet.

Third, and perhaps more important, Mr. Greenspan may have hit the green light foralternative energy entrepreneurial endeavors, possibly fanning the flames of a bull marketin the area.

It can all be summed up in Greenspan’s goal, a strong U.S. dollar, and a desire tokeep America at the top of the heap in an increasingly competitive and fractious world.There’s no guarantee that what Greenspan seems to be trying to do will work. But hedoes get an A for effort.

Oil Market Summary: Alternative Energy To The Forefront

Editor’s note: Our energy section has added gold stocks and gold ETF recommendations.

Energy traders will have a whole new world to deal with this morning, as Fed ChairmanGreenspan may have opened a whole new can of worms, and the alternative energy genie mayhave leapt out of the bottle. The quote that may have rocked the energy world is this,according to the Wall Street Journal: “Mr. Greenspan said, "If history is anyguide, oil will eventually be overtaken by less-costly alternatives well beforeconventional oil reserves run out ... . We will begin the transition to the next majorsources of energy, perhaps before midcentury."

Mr. Greenspan’s speech and a projected change of trajectory for soon to be HurricaneWilma hit oil prices overnight. Crude oil was trading below $64. Natural gas was testingthe $13 area. And gasoline was below $1.75 in pre U.S. trading on 10-18.

Perhaps the most important aspect of Greenspan’s speech was the part aboutalternative energy, which may have given the usually overlooked sector a new boost ofcredibility.

For now, it’s just a speech. To be sure, it won’t happen overnight. And oilprices could still move higher. After all, it takes funding, and the research intoalternative fuels is time consuming. But the seeds have been clearly planted, and theworld may not be the same after this.

And of course there is the reality of damaged oil infrastructure in the Gulf as stillclose to 70% of oil production capacity was offline, although last week’s energysupplies were better than expected, as imports are picking up the slack along with crudefrom the Strategic oil reserves. According to MarketWatch.com: “Refinery capacityutilization rose to 74.9% last week from 69.8% during the week ended Sept. 30.”

There is also the weather itself, with forecasts offering different opinions. Traders arestill betting on a cold winter, but some forecasts are predicting the opposite. TheNational Weather Service The long-range outlook, covering December through February saidthat “Temperatures will likely be above long-term averages in the Pacific Northwestand across much of the nation's midsection.” with the rest of the country actingwithin normal expectations. This, of course means that if it comes to pass, the Northeastwill have a cold winter and heating oil prices could spike.

On the charts, if prices break below $56 on the December crude contract, there could bemove toward $50. $71 is key resistance.

The Philadelphia Oil Service Index (OSX) is still testing the 160 area.


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Chart Courtesy of StockCharts.com

The Amex Oil Index (XOI) could bounce further. XOI has been trading decisively below 1000,a long term pivot point. The next major support level is 936, then a test of the 878-900area is possible, where bull market support, at the 200 day moving average awaits.

In the current market, we recommend a copy of "SuccessfulEnergy Sector Investing"(Random House/Prima Venture) . The book predicted many of the current developments inthe economy and the energy markets, and provides an excellent set of benchmarks andtrading lessons for what could be in store for the future.


TechnicalSummary:


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Chart Courtesy of StockCharts.com

Bounce Still Tepid. Watch Gold, Oil, and U.S. Dollar

Important: Fallen Angels section has been updated. Click on Fallen Angels link for fulldetails. See Energy section for Gold, energy, bond, and currency timing.

Market breadth and volume on the three day bounce has been less than impressive, and sofar looks like little more than short covering. It is early, though, and things could pickup steam, as it could take several days for a trading bottom to be fully in place.

So far, little has been accomplished technically, although one or two more strong dayscould easily change that. That means that this is another one of those watch and waitmarkets. The NYSE advance decline line has broken down, making a new low on 10-13. Thenumber of stocks making new 52 week highs is still rising. And the major indexes, exceptfor small stocks, remained at or below their 200 day moving average, signaling that thelong term trend for the stock market has turned lower.

The Nasdaq 100 has moved above its 200 day line, along with the small stocks, but theNasdaq Composite, the Dow Industrials, the S & P 500, and remained below their 200 daymoving average. That means that, much of the stock market, as measured by a wide varietyof indexes is in territory that can lead to a bear market. To be sure, we’re notcalling the current situation a bear market. That’s more a subjective than anobjective thing, at least at this point. But what does matter, is that unless thingschange, the trend in stocks now has a better than even chance to continue lower.

Alternative Markets On The Rise And Fall

Oil, gold, and the dollar are going to be reacting to Mr. Greenspan’s speech, and thepolitical developments in Washington, while stocks start paying close attention toearnings.

Check our energy section for bond and currency recommendations.

What To Do Now

This is a time to be very patient and very awake, as a big move could start at any momentgiven the increasingly tense situation in the world, geopolitically, and economically.

Keep your options open. Raise cash if you’re a long term investor. Look for shortsales if you’re a trader. Looking at the futures markets, as a hedge or an all outtrading venue can’t hurt. But also start considering the potential for a lastingbounce in stocks and which sectors are likely to outperform. If this is the scenario thatwins out, we should know more by the middle or toward the end of the week starting onOctober 17.

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.


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Chart Courtesy of StockCharts.com



Fear Fades Rapidly

Bearish sentiment might have reached high enough levels last week to lead to a marketrally in stocks last week, but it faded quickly on Monday, suggesting that a flat marketmay lie ahead.

The CBOE Put/Call ration checked in at 0.87 on 10-17 fading quickly, and well off of the1.31 on 10-13, another good number, finally taking out the 1.23 on 9-26. A consistentstring of low readings can be a sign of excessive optimism and often signals a top in themarkets. Readings below 0.5 are of concern, but not as serious as readings below 0.40.Readings above 1.0 are bullish. The numbers cited here are meant to be evaluated on aclosing basis.

The CBOE P/C ratio for indexes checked in at 1.48 off of the 1.65 on 10-14 and off fromthe bullish 2.26 on 10-13, but still below the 3.28, on 9-26. This was close to the 3.89on 9-22. The index number rose to 3.01, on 9-2, a rare figure that preceded a rally instocks. Readings below 0.9 suggest too much bullish sentiment, just as readings above 2are usually required to mark major bottoms.

The VIX and VXN had readings of 14.67 and 16.22 on 10-17, coming back down, what you wantto see when a rally is possible.. When these indexes begin to rise, it is a sign ofconcern as rising volatility indexes suggest that an acceleration of the prevalent trendis on its way. A fall near or below 20 on VIX and 30-40 on VXN is considered negative, afact that is usually confirmed when the volatility indexes begin to rise. Readings above40 and 50, respectively, are often signs that a bottom may be close to developing.

The futures traders polled by Market Vane registered a 58% Bullish consensus. This numberis now neutral.

Our Big Trend Model fell to 15%, a very oversold level. The index had a very accurateoversold reading of 12.5, delivered on 4-29-05, a correct call on that trading bottom.Readings near or below 40% often precede market bounces, but may initially be signs ofcaution when markets have had a rally. Readings above 80% are usually bearish. The BigTrend Model is composed of technical and monetary indicators and updates automatically ona weekly basis.

The NYSE insiders bought stocks aggressively on 9-30, for the fourth straight week afterfive weeks of heavy selling. This is encouraging. Short selling by NYSE specialistsremains near all time lows by historical standards, since we‘ve been keeping thisindicator. This indicator is very positive when short selling by the specialists is low asthe same time that they are net buyers of stock. The heavy amount of selling over the lastfew months has turned this indicator neutral. This is a set of very smart investors, andwhen they turn positive or negative, it is just a matter of time before the marketfollows. Spec data is released to the public with a two week lag, so is not useful as amarket timing tool, but is excellent background and confirmatory information.

Market Moves

Will Fuel Cell And Ballard Power Get The Call?

Fuel Cell (Nasdaq: FCEL) and Ballard Power (Nasdaq: BLDP) are the best known alternativeenergy companies. But their stock prices have not reflected their relative namerecognition.


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Chart Courtesy of StockCharts.com

Ballard Power is a stock to watch. Fed Chairman Greenspan's recent speech suggested thatthe alternative energy markets could figure greatly in the energy equation for the future.

This company may have a better future than other fuel cell competitors as its focusinvolves the automotive sector, where it has some joint venture work ongoing.

As with much of the alternative energy area, the company makes no money, and its revenuesare not growing. <!------ CHART -- change daily ---->


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Chart Courtesy of StockCharts.com

Fuel Cell has developed a proprietary fuel for running power stations. But the company isnowhere near profitable, although it has stable research based revenues.

The stock traded as high as 140 in 2000, and is near 5 as of the 10-17 close.

Conclusion

Investors in alternative energy stocks are being asked to take a huge leap of faith. But,the times seem to be calling for that kind of move.




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Chart Courtesy of StockCharts.com

The Amex Biotech Index (BTK) bounced back along with the market. Resistance remains aboveat 630.


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Chart Courtesy of StockCharts.com

The Amex Pharmaceuticals Index (DRG) is still struggling. The drug sector made a new lowon 10-11, and remained below its 200 day moving average, a long term support level.


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Chart Courtesy of StockCharts.com

The Philadelphia Semiconductor Index (SOX) rallied, against the grain on 10-14. The indexdid not get hurt as bad as the market on 10-12. SOX broke to a new low on 10-11, with the450 area now becoming a resistance level.


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Chart Courtesy of StockCharts.com

Small stocks bounced back on 10-14 better than large stocks. This is worth watching.


Disclaimer: The financial markets arerisky. Investing is risky. Past performance does not guarantee future performance. Theforegoing has been prepared solely for informational purposes and is not a solicitation,or an offer to buy or sell any security. Opinions are based on historical research anddata believed reliable, but there is no guarantee that future results will be profitable.