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Democrats: Preparing A Mid-TermCrisis For White House.
Oil: Supply Data Due Out. Stocks: Bottoming Still In Progress.
by Dr. Joe Duarte,
Pre-Market Summary
Financial markets settled down after overnight volatility on an unsubstantiated report ina Chinese newspaper that the Yuan was about to be revalued against the dollar next week.According to the report the revaluation is to take place next week. The Chinese governmentcame out and said that they were not aware of any such development being in the works.
Cisco Systems delivered a fairly good earnings report after the close on 5-10.
Oil supply data will be out mid morning to give traders an excuse to make things happen.
Today’s Analysis: Planning For A Mid-Term Crisis.
A mid term election crisis for the White House is not something too many are thinkingabout at this stage of the Presidential Cycle. But, there are some, inside the Beltwaythat are starting to hint at the potential for some kind of fireworks somewhere in 2006.
There is some deep background buzz inside the Beltway that is worth mentioning. Accordingto our highly reliable source, The Beltway Bandit, some well placed rumblings attest tothe fact that “Morale in the military is much worse now than it was a year ago.“There is some anecdotal evidence to suggest that “troops being sent to Iraq arehighly demoralized, at a level comparable to that of troops returning from Iraq a yearago.” Certainly this should come as no surprise, especially when recent wire servicereports noted that Army recruiting quotas for the month of April fell over 40% short oftargets.
Reservists whom we have spoken to, off the record, are not particularly enthused abouthaving to take a second tour of duty in Iraq.
Still, the ever vigilant Bandit noted that some well placed types in all kinds of shadowyplaces near the Potomac and other wooded areas in the Capital suggest that the Iraq warmay be unwinnable, and that “the three "tribes" (ie, Kurds, Sunnis andShi'ites) will fight a war.“ There is even some talk that suggests that “Iraqwill band with Iran in a Shi'ite alliance that will threaten the region.”
Some are starting to speculate that the war is once again a key issue and that in order toprevent a major electoral loss for the GOP, “Bush will begin pulling troops out ofIraq this fall and complete the job before the 2006 election.”
The Bandit has picked up some chatter that suggests “the Administration is seriouslyworried about the possibility of a perfect storm (in the mid-term elections) leading to aDemocratic sweep and fears impeachment if this happens.“
At this point, much of this is just chatter, but what makes this kind of talk mostinteresting, according to the Bandit, is that it’s coming from “sober, andserious“ corners and crevices of the Washington area.
To be sure, much seems to be conjecture, given the fact that much about the war is stillup in the air, and that the election is still some 18 months away.
For example, even though some in the Capital are pessimistic about the war, the perceptionof how things are going is still partisan to some degree. This is not to say that Americanlives being lost are negligible, or that the daily car bomb situation are unimportant.
Indeed, there is an emerging line of thought out there that sees what is happening in Iraqas a quickening, or jelling of the situation.
Energy Sector
Oil Market Summary And Outlook: Supply Data Drama Likely
Expect the usual volatility around mid morning when the oil supply data from the API andthe IEA are released. The market is expecting another build in crude oil stocks. Someanalysts are saying that there could be a surprise draw, given the fact that refineriesare trying to step up gasoline production for the summer driving season.
But, with refineries already working at high levels of capacity, and frequent problemswith operations, such as the Texas City fire in March, and a recent power outage in aConoco Phillips refinery in Louisiana, much external activity continues to hit he marketon a daily basis.
We won’t hazard a guess, since the market always finds a reason to move oil after thefigures are released.
We will note that some are now starting to say that the usual fundamentals in the oilmarket are no longer applicable. That means that the old, “this time isdifferent” attitude is starting to take hold. That’s another danger sign to keepan eye on. When bull markets reach the point of “New Paradigms,” as the Internetbubble did in 2000, the climate is really dangerous.
Oil futures were trading below $52 in electronic pre-U.S. trading on May 10th.
This remains a technical market which will be moved mostly by supply data and developmentsin external events. If crude falls below the $45-$48 area, a move to $40 is possible. Thenext question is whether such a move would be temporary or just merely a correction in along term bull market.
History shows that oil moves on supply, not demand. And at this point, there is plenty ofsupply, with more coming, if Iraq continues to improve its security and production. Recentreports show that Iraq’s production is now more than it was last year at this time.If that trend remains in place, and countries like Libya continue to upgrade theirinfrastructure, we could see lower, or at least steady prices over the next 12-18 months,assuming that there are no catastrophic events along the way.
Still, until the 200 day moving averages on futures contracts get taken out convincingly,we remain in a long term up trend in oil, and in our opinion, we are not very likely tosee oil below $40 per barrel for some time, unless something very dramatic happens, suchas a collapse of the Chinese economy, which as we’ve stated numerous times (see ourarchived IQ reports) 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
Hedge Fund Rumor Hits Positive Technicals
One bad rumor was enough to knock down the positive technical action of the last few days.That’s the kind of market we’re in, a tough, grinding two yards and a cloud ofdust type affair.
Sector selection, and strict adherence to buy and sell rules remains the key to success.Active traders should also keep their options open on the short side, while investorsshould still have a good amount of cash ready to spend when the market gives an all clearsignal. Buying on strength, and sticking to using sell stops is still the key to success,for those with a short to intermediate term time horizon, especially in a narrowly tradedmarket.
The S & P 500 failed near the overhead resistance at 1180 that we‘ve beenpointing out lately. The Nasdaq also rolled over, at the tough resistance near the 200 daymoving average area, near 1990.
Still, there are some positives in place. W bottoms are now fairly evident on all majorindexes, including those for small cap stocks.
Biotech stocks broke out above key resistance on 5-10.
And there are a few beaten up tech stocks that are acting reasonably well, nevertheless.Some have made it into our Fallen Angels portfolio, which we suggest subscribers look atcarefully for some ideas.
What’s the most likely scenario? This is a likely to remain a day by day kind of agrind.
Take this market one day at a time, and be ready for reversals.
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
Stick with strength. Right now it is mostly focused in health care. Biotech is offeringsome interesting possibilities, and the rally there seems to be broadening out.
But, more than even, strict adherence to buy and sell rules is important.
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
