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Iraq: Zarqawi’s Dangerous Strategy.
Oil: Energy Stocks Blast To New Highs.
Stocks: Still Trying To Rally.
by Dr. Joe Duarte,
Dallas, TX, July 6, 2005, 08:00 EST * excerpts from daily reports
Hurricane season is taking oil prices higher, but small stocks, biotech, and the energy sector showed some serious muscle on Tuesday. The only question remaining to be answered is whether Wall Street will stay awake for the rest of the summer. Watch for the ISM non manufacturing number to move the market around 10 A.M. Eastern time.
Today’s Analysis: Iraq: Zarqawi’s Dangerous Strategy
Al-Qaeda is now openly targeting Arab diplomats in Iraq, hoping to discourage their countries’ re-establishment of relations with Baghdad. But, the tactic may backfire, as multiple constituencies in and out of Iraq may be starting to look at the situation as an opportunity rather than an occupation.
In a sign that Al-Qaeda might be running out of ideas, according to Reuters: “al-Zarqawi said his group had formed a new armed wing to fight the Shi'ite militia Badr Brigade, according to an audio tape attributed to him and posted on the Internet on Tuesday.”
The new tactic is aimed at the Shiite majority in Iraq, and could backfire. Reuters added: “Hadi al-Amery, the leader of Badr Brigade, a powerful Shi'ite militia which fought Saddam Hussein from exile in Iran, has denied running hit squads against Sunnis and said peaceful politics was the only way forward for his group. Although the group now calls itself the Badr Organization and says it is a political movement, many Iraqis believe it is still a fighting force.”
Zarqawi, reportedly broadened his targets to include the Iraqi army: ["We declare that the Iraqi army is an apostate, agent army allied to the crusaders and came to destroy Islam and Muslims. We will fight it," the speaker said. The sworn foe of U.S. forces in Iraq said "intellectuals" had contacted him to convince his group of abandoning their fight. "What brings more pain to the heart is that some intellectuals have sent me messages asking me to stop fighting in Iraq," he said.]
There are other signs that Zarqawi’s grip on the situation in Iraq may be fraying, at least slightly, and that his latest tactic, while certainly violent, may be wearing thin on the population in Iraq, and perhaps even elsewhere: “Zarqawi's spiritual mentor, who Al Jazeera television said was arrested by Jordanian authorities on Tuesday, criticized al Qaeda suicide attacks in Iraq and those against Shi'ites. ["If you can kill an enemy with a Kalashnikov or a weapon, then (suicide) operations are not valid," Issam Badrawi, better known as Sheikh Abu Mohammad al-Maqdisi, told Al Jazeera television. "We can't declare Shi'ites infidels or ... make them equal to Jews and Christians," he said.]
Other Signs Of Discord And Disagreement
There are other interesting developments with regard to Iraq. According to Middle East Newsline, there are some signs of a potential splintering amongst different groups in the Sunni resistance. The Intelligence service reported: “The U.S. military has detected a range of Sunni insurgency groups, with differing goals. Officials said the goals of various Sunni insurgency groups range from the withdrawal of the U.S.-led coalition to the conversion of Iraq into an Islamic state. They said the groups have been cooperating less over the last few months.”
Energy Sector
Oil Market Summary And Outlook: $60 Still The Hinge
Oil, oil service, and natural gas stocks blasted to new all time highs simultaneously on Tuesday while crude oil flirted with the $60 area.
The XOI, XNG, and OSX indexes all made new highs, as worries about hurricane damage to offshore rigs, and expectations of continued strong demand for fuels moved things along.
Supply data will be out Thursday, one day later than usual, due to the July 4th holiday. Traders are betting on an increase in oil supplies when the data is reported. According to Bloomberg: “OPEC's output rose 130,000 barrels a day to 30.08 million barrels in June, according to a Bloomberg survey of oil companies, producers and analysts. It was the highest since October, when members pumped 30.54 million barrels a day, the most since 1979, based on U.S. Energy Department records.”
According to Reuters: “Fears of a fourth-quarter supply squeeze amid robust U.S. oil demand -- thus far seemingly impervious to the impact of soaring prices -- has emboldened speculators to test the upper limits of what consumers can endure. ["The world crude oil market has now boiled down to one in which prices and demand are in the ultimate prize fight,"] said Martin King, research analyst at Canada's First Energy Capital Corp., said in a report. Below-average U.S. inventories of distillates -- which include high-demand fuels such as diesel and heating oil -- have traders worried about refiners' ability to meet demand this winter, when consumers around the world use oil for heating.”
Our very long term opinion has not changed. We are still in a very long term bull market in oil, until proven otherwise. The long term line in the sand, for us, remains $40 per barrel.
Chart Courtesy of StockCharts.com
Technical Summary
Chart Courtesy of StockCharts.com
Nice Rally But Few Index Breakouts
Small stocks, biotech, and energy delivered the goods, while the Dow, the S & P 500, and the Nasdaq barely came off of the bottoms of recent trading ranges.
The market’s internals looked fairly good, though, as breadth was excellent, although volume was tame.
We might have seen the last bit of bullish seasonality for the stock market, as the first trading day of the month and the first five days are usually bullish for stocks. But we may not get the seasonality kick this time around.
We remain a bit skeptical, and note that after the 4th of July, Wall Street goes to sleep until after Labor Day. So we could be in for another frustrating summer.
Still, there are some pockets of strength. Visit our energy and biotech sections with special care, as new stocks have been added.
For now, unless, you are concentrating on what’s working, it’s time to tighten stops, and pay special attention to trading rules, and discipline.
It is also a good time to explore hedging strategies, such as short selling, and our currency timing model, which is currently long the U.S. Dollar.
Remain patient. Take this market one day at a time, and be ready for reversals.
What To Do Now
It’s time to manage portfolios, rather than add to them, unless a stock is showing exceptional strength.
Stick with strength in open positions. Keep an eye on the chip, and biotech sectors. Select energy stocks may also 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 a bad news event.
Chart Courtesy of StockCharts.com
About Dr. Joe Duarte
