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U.S.: Nuclear Blackout Scenario.Oil: Testing $49. Stocks: Seasonal Bias Could Push Averages Higher.
Dallas, TX, May 2, 2005 , 08:00 EST
Stocks could get a seasonal bounce, at least on Monday, as pension funds put money towork. The Fed meets on Tuesday, and everyone will be reading their post meeting statementfor clues as to what’s next. The market is expecting the Fed to continue to raiserates. That means that if the central bank signals that it’s done raising rates,we’ll have some major volatility.
Today’s Analysis: U.S.: Nuclear Blackout Scenario Ignored By Media
As Warren Buffet strummed a ukulele, and basked in the glory of his following, and theFruit of the Loom guys, we, of significantly lesser means, and fruitful following but notpursuit, and just as intent on basking in the glory of breakfast, pulled into a cozylittle restaurant in Dallas, and sat down across from a familiar face on Saturday.
Across the modest little table, in a slightly crowded but comfortable room with a Europeanfeel, sat a thoughtful fellow who spends a fair amount of time listening to people withlarge amounts of money talk about the little things that bother them. This fellow, whom wehave dubbed Racer X, for the purposes of anonymity, has been a good source and confidantto us on many occassions, and is extremely reliable. Over many years, our conversationshave become more focused on national security, as well as the potential for doomsdayscenarios. Once in a while, our friend comes up with an interesting and highly plausiblescenario, or turns us onto an interesting bit of analysis somewhere, which is usuallythought provoking, and often chilling to the bone. So, as we munched on a fairly goodomelet, this is what he told us.
There is a new doomsday scenario to consider: the nuclear blackout. Imagine significantamounts of financial and personal data lost, as the traffic lights, networks, andcommunication systems of the world’s developed countries stop to function. That isthe outcome if a nuclear device explodes in the right place, under the right set ofcircumstances.
Most people recognize the fact that Al Qaeda’s reason to exist is to harm the UnitedStates. And many recognize the fact that the organization always has the potential torepeat their success of 9/11. But, a recent editorial in Investor’s Business dailycasts light on a little known strategy that could be put to use by the group, or anyonewith the means to do so, which would cause significant amounts of damage withoutnecessarily killing a large number of Americans, at least immediately.
According to a little publicized editorial in IBD “The Sept. 11 commission statedthat our biggest failure was one of imagination. But there’s a far greater threatfacing this nation, and this time we’ve been warned.”
The major news item happened “in early March,“ as “Arizona Republican Sen.Jon Kyl chaired a hearing on a major threat to the U.S, one involving electricity, or thelack of it, as a threat not only from terrorists, but from rogue states such as NorthKorea and Iran, and looming adversaries such as Communist China. That threat is calledelectromagnetic pulse (EMP) and Kyl calls it the one way we could lose the war on terror.As he notes, a single nuclear warhead, detonated at the right altitude, would interactwith the Earth’s atmosphere, producing an electromagnetic pulse radiating down to thesurface at the speed of light.
If the theory is correct, “Nobody is harmed or killed immediately by the blast. Butlife in the U.S., the world’s only superpower and its largest economy, comes to ascreeching halt as a country dependent on cutting-edge 21st century technology regressesin time almost a century instantaneously.”
The possibility is not as remote as some might suggest, as “North Korea has bothnuclear weapons and intercontinental missiles, and it exports missile technology aroundthe world. Iran has active nuclear and missile programs. And increasingly bellicose Chinalast year launched a new Type 094 nuclear-powered ballistic missile submarine that willcarry a version of its DF-31 ICBM. As Kyl notes, Iran has surprised intelligence analystsby describing the midflight detonations of missiles fired from ships on the Caspian Sea as[“successful.”] Imagine one of those missiles carrying an Iranian nuke beingfired from a ship in international waters off the American coast, detonating high over anIowa cornfield. Or it could be a terrorist Scud launched from a seagoing freighter.Al-Qaida is believed to own 80 such vessels, and Scuds can be purchased on the open marketfor about $100,000 each.”
Energy Sector
Oil Market Summary And Outlook: Slowing Economies Taking Toll On Oil Price
Crude oil prices fell below $50 on Friday, as traders didn’t want to get caught longin case of something happening over the weekend.
One of the major reasons for the fall of crude, is slowing demand in Japan, Europe, andeven Canada. According to the Wall Street Journal, “U.S. exports of goods andservices grew 7% in the first quarter, according to the Commerce Department, up from 3.2%the quarter before. However, export growth was stronger in the early part of last year andthen moderated sharply. As a result, most economists are predicting export growth for allof 2005 will fall well short of last year's overall performance.”
According to the Journal: Rockwell Automation Inc. of Milwaukee, a maker of factoryautomation equipment is reporting ["systematic slowdown"] of demand for itsproducts in Europe. “James Gelly, the company's chief financial officer, said thatduring Rockwell's fiscal second quarter, which ended March 31, business grew 33% in China,57% in India, and 22% in Latin America, while Europe declined 1%. Germany, Europe'slargest economy, was especially troubled, with a decline in the double-digits for theperiod.”
With OPEC still pumping full tilt, and demand for crude slowing as a result of slowingglobal economies, it seem as if the bull market in oil is heading for a slow down, aswell.
The bottom line is that every time oil has tried to move above $55 lately, heavy sellinghas come into the market. A break below $46 would be a sign that the bull market in oil,might have ended.
Oil and oil service stocks are also in falling mode of late, adding to the bearishpicture. See our energy section for short sale suggestions.
Still, this is a key point to keep in mind. Even with the recent weakness, this remains along term bull market in oil. At this point, the recent decline in oil remains in thecorrection class, given the scope of the bull market that we’ve been in. Until the200 day moving averages on futures contracts get taken out convincingly, we remain in along term up trend in oil, and in our opinion, we are not very likely to see oil below $40per barrel for some time, unless something very dramatic happens, such as a collapse ofthe Chinese economy, which as we’ve stated numerous times (see our archived IQreports) is a plausible scenario.
Investors should remain wary of the oil market, and should use extreme caution in anyexposure there. Aggressive traders should be looking to go both short and long at thispoint depending on the individual circumstances of each position.
Chart Courtesy of StockCharts.com
Technical Summary
Chart Courtesy of StockCharts.com
W Bottom In S & P 500 Visible But Not Complete
The major indexes again escaped a date with lower lows. And since little changed onFriday, there is still the potential for a W bottom on the Nasdaq, as well as on the S& P 500. Key resistance levels to watch are Nasdaq 1988 and S & P 500 1155. An S& P 500 close below 1135 would be very negative.
The S & P 500 climbed back above its 200 day moving average, and seems to be in thefinal stages of what could be a W bottom. But there is still plenty of work to do.
Bearish sentiment is still rising, but not all stocks are getting a bounce out of it. Ifthere is no more down side action, this market could go sideways for a while.
Money is still flowing into health care stocks and slowly dribbling out of the energysector. Financial and technology stocks, the traditional leadership areas of the marketremain to show that they can again assert themselves as leaders of any potential rally.
This kind of a market is maddening. Indecision and anguish can lead to bad decisionmaking. The way to get around this is to be careful, and to have above average levels ofcash, whether you are a trader or an investor.
Any money committed to stocks, should be aimed at the strongest stocks in the strongestsectors, with a short term time frame. Traders should also be looking to short weakstocks, with a short term time frame as well.
This is a tough time, and we are well aware of it. But, all we can do is look at themarket every day and make the best decisions about all our recommendations, individually,on a daily basis. If short positions go lower, we’ll keep the position open. If thereare opportunities to buy stocks, we’ll buy them. And if things get choppy, we’lltry to stay on the sidelines.
Markets such as this one require a good deal of time and attention to detail. Our plan isto be there everyday looking for opportunities to make money whenever possible, and tokeep subscribers from losing money as well.
Our patient and sector oriented approach is well suited to this market. See our ETF,energy, and health care areas for new and updated recommendations.
What To Do Now
This is still a time to be patient, but it is also a time to start buying stocks that areshowing strength. Our lists have been updated with new candidates. See our Fallen Angles,Technology Investor, Health And Biotech, Energy, as well as our ETF sections for newguidance.
Aggressive traders should keep open shorts that continue to fall. But new money for nowshould be geared to the long side.
Now, more than even, strict adherence to buy and sell rules is important. Buying onstrength, and sticking to using sell stops is still the key to success, for those with ashort to intermediate term time horizon, especially in a narrowly traded market.
Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems for thelatest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, andtechnology have also been updated.
Chart Courtesy of StockCharts.com
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