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Europe: French No Vote A Prelude For More Trouble. Oil: Still Above$50. Stocks: Can U.S. Stocks Rally In Sleepy Summer?
by Dr. Joe Duarte,
Dallas, TX, May 31, 2005 , 08:00 EST * excerpts from daily reports
Pre-Market Summary
Global stocks were dampened overnight after the French voted no on the EU Constitution.Currency markets were moving rapidly. And Wall Street is about to head into the SummerDoldrums.
Today’s Analysis: Europe: In Trouble And Getting Worse
The rejection of the European constitution by 55% of French voters has brought a difficultsituation in France to a much wider and highly visible international stage. Andexpectations are for an even worse fate in Dutch voting on the proposal on Wednesday.According to Reuters “The Netherlands also looks set to vote down the constitution onWednesday, with polls showing the "no" vote running at 60 percent on the heelsof a French vote where the "no" camp garnered 55 percent.”
Europe is widely viewed around the world as being in a political crisis, and of being onthe verge of a major economic malaise. Unemployment is pegged at 8.9% in the 12 nationblock that uses the Euro as its common currency. Bloomberg reported Citing that “theslowdown in Europe and rising energy costs, the OECD joined European leaders, includingItalian Prime Minister Silvio Berlusconi, in calling for the European Central Bank to cutinterest rates.”
U.K. Prime Minister Tony Blair, a political foe of French President Chirac wants to take a“time out,” and called for a period of “reflection.“ The New YorkTimes quoted Blair‘s reaction to the vote: "Underneath all this there is a moreprofound question, which is about the future of Europe and, in particular, the future ofthe European economy and how we deal with the modern questions of globalization andtechnological change."
Other European leaders expressed a willingness to work out the problems over the nextseveral years. Still, The New York Times added: “Romano Prodi, the former presidentof the European Commission, (who) had predicted that a French no would mean ["the endof Europe."],“ on Monday ‘called the outcome ["a disaster,"’but insisted that the union would continue to function under current rules and that thingscould be worse.”
The Euro plunged in overnight currency market trading, with the repercussions spreadingfar and wide. For the U.S. a stronger dollar will continue to finance the massive twindeficits. For China, it could bring another round of tightening on a noose that is addingon new knots on a daily basis as both the U.S. and Europe continue to put pressure onBeijing to bring its trade policies to a more even footing. And for Europe, theuncertainty level is now off the scale.
According to VOA.com, in a summary echoing the mainstream consensus assessment of thesituation, “The rejection by French voters of the European Constitution Sunday hasplunged France into a political crisis. The no vote has hurt both the ruling conservativeparty of French President Jacques Chirac and the opposition Socialists.”
Many are saying that the “non” vote, is as much a reflection of PresidentJacques Chirac’s political fortunes, as it is an expression of France’s lack ofinterest in participating in economic globalization.
But, much of the rejection may have to do with economic conditions in France, as much asthe negative expectations that a more intertwined fate with the rest of Europe could makethings worse. According to Bloomberg, on May 31, “Consumer confidence in France,Europe's third-biggest economy, plunged in May to its lowest on record and unemployment inApril held at its lowest since 1999. An index based on a survey of 2,000 people fell tominus 29, the lowest level since a new survey was introduced in November 2003, from minus24 in April, Paris-based statistics office Insee said today. The jobless rate wasunchanged at 10.2 percent, the Labor Ministry reported.”
Bloomberg added: “An unemployment rate of 8.9 percent in the dozen nations sharingthe Euro has caused political damage elsewhere. In Germany, Chancellor Gerhard Schroeder'sparty lost a May 22 vote in the most populous state in the country amid a stagnatingeconomy and rising joblessness. The number of jobseekers in Germany stayed at 4.87million, adjusted for seasonal swings, the Nuremberg-based Federal Labor Agency saidtoday. The jobless rate held at 11.8 percent, close to the postwar record of 12 percentrecorded in March.”
Energy Sector
Oil Market Summary And Outlook: Global Economy In Focus
Oil stocks bounced last week, and reversed intermediate term down trends. Exxon Mobil hasbeen upgraded by a Wall Street brokerage. But external events could keep oil prices fromrallying in a big way from current levels.
The French vote against the EU constitution is getting the headlines. But behind thescenes, there is an economic slowing evident in Europe, as consumer confidence has fallen,and GDP figures are flat all over the continent. China’s growth is also expected toslow some. And the U.S. is likely to continue to raise interest rates, which couldeventually lead to a slowing of the U.S. economy.
OPEC is not likely to cut production in June. That means that the combination of slowingdemand, if global economies continue to slow, and stead production near maximum levels,could bring the market into balance, and at some point into a situation of surplus.
The market is going to start looking at that as U.S. economic figures are released thisweek, especially the ISM number, a very reliable gauge of economic activity from thepurchasing managers.
Oil prices are still testing the $50 area on the July contract for Light Sweet Crude. Oiland natural gas stocks are trying to stabilize. OPEC is debating what it’s going todo about its quotas. And crude supply, despite this week’s reported draw down, is inthe best shape that it’s been in for years.
Supply is in fairly good shape on a seasonal basis. According to Reuters: “Crude oilstocks in the United States fell 1.6 million barrels to 332.4 million barrels in the weekended May 20 -- against analysts' forecasts for a 1.2 million-barrel-build -- marking onlythe second drop over a 15-week period, the Energy Information Administration (EIA) said.Higher refinery demand and limited imports going into summer might spell further declinesin stockpiles, which had risen sharply over the past 15 weeks to their highest level since1999, the EIA said. U.S. gasoline supplies rose 600,000 barrels to 215.4 million barrels,leaving them in the upper end of the average range for this time of the year. The peakusage driving season kicks off over the Memorial Day holiday this weekend.”
Marketwatch.com reported that according to the API “crude supplies climbed by 2.3million barrels, but gasoline fell by 416,000 barrels,“ while “distillate stocksrose by 2.5 million barrels.”
We’ve been expecting a bounce in oil, and it looks as if it is now here, as crude hasfound support just below $50 in the July contract. Still, unless the market can take outthe $53-$55 area convincingly, the charts are saying that the down trend remains intact.
Investors should still remain wary of the oil market, and should use extreme caution inany exposure there. Aggressive traders should be ready to trade both long and short inthis period of possible volatility.
Chart Courtesy of StockCharts.com
Technical Summary
Chart Courtesy of StockCharts.com
Summer Doldrums Are Here
Don’t look now, but trading could slow significantly over the next three months. AsWall Street trumpets the arrival of Summer Rally season, history shows that the periodbetween Memorial Day and Labor Day, is also a period of thin markets, as Wall Street headsoff to extended vacations.
This summer may be different. But it’s much too early to call, at this point.
The market heads into the slow season in decent shape technically, although it isoverbought, and could deliver dull trading for several days, barring external events.
Technology and biotechnology stocks are still moving higher, and the major beneficiary isthe Nasdaq, where a test of the 2100 area looks likely over the next two to three weeks,barring a major external event. That leaves the S & P 500 1200 level as the other keyresistance area for now. It would also be nice to see one good momentum thrust day, wherethe ratio of up volume to down volume on the NYSE would be at least 9 to 1.
Market breadth has improved. And the number of stocks making new lows has begun to shrink.We’d like to see the number of new highs expand more aggressively though.
This market still has to be traded from the long side, with the usual amount of cautionand strict attention to trading rules.
Tech and biotech stocks continue to act well. Oil and natural gas stocks could also startto recover. See our energy section for updates. Our Fallen Angels portfolio and ourTechnology Investor sections are full of interesting looking trading suggestions. Smallstocks also showed improvement.
In this market, stock and sector selection, along with strict adherence to buy and sellrules remains the key to success. Active traders should also keep their options open onthe short side, while investors should still have a good amount of cash ready to spendwhen the market gives an all clear signal. Buying on strength, and sticking to using sellstops is still the key to success, for those with a short to intermediate term timehorizon, especially in a narrowly traded market.
Remain patient. Take this market one day at a time, and be ready for reversals.
What To Do Now
Stick with strength. Keep an eye on the chip and biotech sectors. Select energy stocks mayalso be worth some risk now on the long side. Don’t make big bets on any position,and have as many open positions as possible in order to diversify against the risk of abad news event.
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
