The Internet's Intelligence Digest
Intelligence, Market Timing, AndTrading Strategy For Traders and Investors
Federal Reserve: Hell Bent For Higher Rates. Oil: Why Are They Jumping Ship? Stocks:Climbing A Shaky Wall Of Worry.
by Dr. Joe Duarte,
Dallas, TX, August 8, 2005, 08:00EST
Traders will try to pick up the pieces after last week’s messy Thursday and Fridaysessions. Oil looks ready to test the $65 area. Bonds could set new yield highs. TheFederal Reserve’s meeting for tomorrow is a major worry, although rates are expectedto go higher.
The pre-market stock index futures were higher. The U.S. Dollar was weakening. Asianmarkets closed slightly higher. European markets were higher. Treasury bond yields wereflat. The U.S. Ten Year note was trading with a yield of 4.40 % in electronic trading.Crude oil was trading near $63. Gold was trading near $441.
The economic calendar for August 8 No reports on Monday. For August 9: 7:45a.m.ICSC-UBS Store Sales Index For August 6 Wk. Previous: +0.9%. 8:30a.m. Second-QuarterNon-Farm Productivity. Consensus: +2.0%. Previous: +2.9%. 8:55a.m. Redbook Retail SalesIndex For August 6 Wk. Previous: +0.3%. 10a.m. June Wholesale Inventories. Consensus:+0.2%. Previous: +0.1%. 5p.m. ABC/Money Consumer Confidence For August 6 Wk. Previous:-11. Source: Wall Street Journal.com.
Today’s Analysis: Hell Bent For Higher Rates
Important: Visit our energy section for new recommendations on U.S. Dollar TradingSystem
The Federal Reserve told the financial markets last week that interest rates are goingsignificantly higher. The Fed essentially told the bond market to get real, and to startacting as if inflation was a problem, rather than to continue to keep long term ratesartificially low and continue to feed a housing market bubble.
The market responded by sending U.S. Ten Year note yields above 4.3% while the housingstocks took a tumble.
According to the Wall Street Journal’s Greg Yip, a well connected Fed watchingreporter: “As the Federal Reserve prepares to raise short-term interest ratesagain next week, officials there increasingly believe the bond market, which setslong-term rates, is diluting their efforts to tighten credit and contain inflation. Theresult: The longer the bond market keeps long-term rates unusually low, the further theFed is likely to raise the short-term rates it controls in an effort to keep the economyfrom overheating. Conversely, sharply higher bond yields would encourage the Fed to stopraising short-term rates.”
Quoting no one in particular, Yip continued: “Fed officials say future rate movesmostly depend on what data indicate about growth and inflation. With inflation low but theeconomy steadily using up unused capacity, officials plan to keep raising short-term ratesto ["neutral,"] a level thought to be between 3 percent and 5 percent thatneither stimulates nor restrains economic growth. The bond market's unusual behavioris complicating that strategy by making it harder to know where neutral is.”
In fact, the Fed is scared, and is asking the bond market for help, so that it can stopraising short term rates, and prevent a 1990‘s style market meltdown, with the mostvulnerable market now being housing.. “Some policy makers worry that bond yieldsare being kept in check by overly complacent investor sentiment which could rapidlydissipate, pushing up mortgage rates and shaking the housing market. Indeed, some Fedofficials see similarities between the attitudes of bond investors today and of stockinvestors in the late 1990s.
More than anything, the Fed is confuses, and is hoping that by using blunt language it canget the bond market to cooperates. “For months, Fed officials have debated thereasons long-term rates have declined. In February, Chairman Alan Greenspan labeled it a["conundrum."] In a speech last week, Federal Reserve Bank of San FranciscoPresident Janet Yellen said the debate "boils down to whether the (drop) is due tovarious ['special factors'] operating independently of the current business cycle, orinstead augurs bad economic news on the horizon." If ["special factors,"]such as increased investor confidence that inflation will remain low, or purchases ofbonds by foreign central banks, are the reason for low bond yields, ["thefederal-funds rate probably needs to be somewhat higher than would otherwise beappropriate,"]Ms. Yellen said. But if the market is anticipating hard economic times,["a somewhat easier policy may be appropriate,"] she said.”
Of course, Greenspan is concerned about still another crash. “Mr. Greenspan lastmonth strongly suggested that he thought investors may be complacent. ["Risk takershave been encouraged by a perceived increase in economic stability to reach out to moredistant time horizons,"] he said. ["Long periods of relative stability oftenengender unrealistic expectations of its permanence and, at times, may lead to financialexcess and economic stress."] His comments are eerily similar to ones he made in 1999about lofty stock prices. "An unwarranted, perhaps euphoric, extension of recentdevelopments can drive equity prices to levels that are unsupportable ... (which) couldcreate problems for our economy when the inevitable adjustment occurs," he said inJuly 1999.”
The Shoe Shine Boy Moments
It’s well accepted on Wall Street that when shoe shine boys and taxi drivers startrecommending stocks, a top may be near. The Internet bubble once again proved this to be atrue concept, as CNBC was interviewing taxi drivers that were running bulletin boards fromlaptops in their cab at the peak of the bubble.
We might have had a couple of those moments last week. A fellow was doing some estimatework for some home repairs at our house. After he gave us the price, we noted that it wasa bit more than we were willing to pay for the work, and that we’d have to thinkabout it.
His response was that a house like ours, in a good neighborhood, would go up in priceforever.
We pointed out the fact that the house was quite old, and that it had a few issues, suchas foundation problems, and so on, as many old houses do.
His response was a bit surprising. He said: “I’ll give you $150,000 for it,cash. We’ll close next week.” And he was serious. He then told us about the sidebusiness his wife and him were running, of buying old houses and selling them for a profitin a few weeks, and how he was sure, he could do the same with ours.
Over the weekend, we got an interesting e-mail. The fellow, who signed the message“Respectfully,” was everything but.. Nevertheless, here’s what he wrote,quoting something we had written some time back:
["Market Analyst Tim Evans of IFR Energy Services told the Associated Press that heexpects crude oil prices to fall to $28 per barrel this summer. We tend to agree, at leastin principle with Evans, and have noted so in this space many times. Oil prices will comedown at some point, although it is hard to predict when."]
Fair enough, we wrote it. Next, hebombarded us with the following:
“What do you think now? Have you heard of 'Peak Oil'? Have you listened to MattSimmons? What do you think of his analysis? Have you checked the 'Field depletion'numbers?....vs...the new oil on line numbers? Have you looked at the world situationincluding Russia, Iran, Iraq, Venezuela? And you think oil could go down significantly? Ifyou can't predict when oil will go down, then aren't you just guessing because I amassuming that you have no data to confirm your guess other than it has gone down inprevious cycles. This is the first real time that oil has gone up due to sustainabledemand...unless you think that world economies stink and are going to tank. I don't seeany evidence of that. Do you? Have you looked at the futures contracts?
And he ended with: “I see much more evidence that oil will never go to Tim Evans dartboard levels again.”
Conclusion
Our position is clear on both issues. We have remained unwavering since April 2005, when,as we have noted previously, we penned a piece for Marketwatch.com, titled: “How Oil,China, And Housing Could All Crash.”
In that article, we concluded: “Assuming that the Chinese economy hits what is aninevitable bump in the road, that would mean that somewhere later this year, perhaps inJuly or August, the traditional time for financial markets to start stumbling andchurning, we could be in for another Asian meltdown, as in 1997's Thai Bhat debacle. Thatcould mean that by October, the usual bad month in the markets, things could be fullyunderway. If U.S. households find themselves in a cash flow crunch, as a result of risingmortgage rates, and the Chinese economy is suddenly drained of foreign cash, beingrepatriated to the United States due to the lure of rising interest rates, a significantchange of scenario in the markets is not just likely, but inevitable. The shift couldstart suddenly, and progress quickly, fueled by fiberoptic communications and the flow ofinformation at the speed of light. A sudden slowing of the global economy would alsonearly guarantee lower oil p rices, a situation that in and of itself, given the geographyof OPEC and Russia, the world's number 1 and 2 oil producers, could lead to geopoliticalinstability. That would explain the increased volatility in the bond and currency marketsof late.”
We haven’t changed our position. Furthermore, we are traders, which means that whatwe believe and how we trade are not always the same thing. We trade based on bothfundamentals and charts, with the charts getting the nod, every time, as we trade what wesee, not what we’d like to see.
At this point, we see diminishing opportunities in stocks, but we are well aware of thefact that it’s not over until it’s over. So we continue to trade, whileprotecting our positions, and choosing stocks carefully. We have recently added a currencytiming service, to help our subscribers weather any potential storms. We have several openshort sales now. And we offer a bond timing service which is also short and doing verywell as interest rates rise.
So the answer to the fellow who wonders if we look at the futures contracts is all overtoday’s installment, as well as with our daily record of columns, and comments. Mostimportant is the fact, that it is now the month of August, and things are starting to heatup, as the Fed is going hell bent for leather on higher rates. At some point, that magicyield, which breaks the bubbles, will be hit. And when it does, things will get veryinteresting.
As the Wall Street Journal’s Greg Yip wrote last weekk: “While Fed officials arein greater agreement that lower long-term rates are a reason to keep raising short-termrates, they disagree on how much. Several are surprised the economy isn't growing fastergiven the booming housing market, and worry that growth could be undermined if short orlong-term rates rise quickly. Other Fed officials are determined to press ahead. Theythink the uptick in long-term bond yields in recent weeks may be evidence the economy isstronger, and inflation a greater risk, than investors and the Fed had thought.”
Higher rates are coming. We’ve all been warned. Which means that our predictions fromApril are still valid.
Oil Market Summary And Outlook: Why Are They Bailing Out?
If oil prices are going to rise forever, why are key players steadily bailing out?
Last week, Exxon Mobil CEO Lee Raymond announced his retirement. To be sure, he’sbeen around long enough to have done just about everything he wanted to. But, why not lastyear? And why not in three years?
Next, the Wall Street Journal reported that Kerr-McGee is selling its North Sea operationsfor $3.5 billion and concentrating on its U.S. operations.
On the surface Kerr-McGee is getting pressure from Carl Icahn. And Lee Raymond may havefinally reached his own saturation point with the business.
But for some reason, it just seems that people in the oil business are making some longterm decisions as oil prices reach significant prices. This is the kind of thing thathappens when smart money decides to get out while the getting is good, and reminds us ofwhen Clinton Treasury Secretary Bob Rubin left. Soon after that, the dollar topped out andthe economy started floundering.
Oil futures were trading above $62 in the September contract overnight. December isflirting with the $65 area.
Interesting times are ahead.
Oil and oil service stocks stalled on Friday. Exxon still can’t get above $60, whichmakes us wonder how much conviction the bulls have on this market at this point.
We’ll say it again. Nothing is etched in stone in the oil markets, especially duringthe mega bull market of all time, which is still unfolding. But, the action lately hasbeen less than inspiring for the bulls. In other words, it’s always possible thatwe’ve seen the top, at least on a short term basis.
Our very long term opinion on oil has not changed. We are still in a very long term bullmarket in oil, until proven otherwise. The long term line in the sand, for us, remains $40per barrel.
The Philadelphia Oil Service Index (OSX) made all time highs on 8-4, but may be pressed tohold onto the lofty levels reached.
Chart Courtesy of StockCharts.com
Small Stocks Shaken Up Badly On Friday
The employment report shook up the bond market, and stocks fell out of bed on Friday.
No major damage was done. But it was still one of those days that you wish hadn’thappened.
The major indexes did not handle the news well, as the Nasdaq remained below the 2200area, and the S & P 500 fell below 1230. Small stocks got the worst of it, with keyshort term support getting hit hard.
Last week’s action shows that there is still rising risk in the market. Investors andtraders should remain vigilant, though, as major global events are possible now on a dailybasis, and could disrupt markets. For now, though, we remain cautiously positive on thismarket, and our stock lists reflect it. The heavy weighing of our picks remains towardsmaller stocks, which are the ones doing the heavy lifting for now. Our ETF timing systemsare also in position to profit from higher prices. And our Fallen Angels portfolio is wellpositioned once again.
What To Do Now
Remain patient. Buy only exceptional strength. Take this market one day at a time, and beready for reversals.
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.
Chart Courtesy of StockCharts.com
Option Players Still Very Concerned
The heavy hedging continued in the options market last week.
Our own sentiment indicators are still negative . MASI delivered another sell signal on8-5, its third sell signal since June. MAGI remained negative after its 6-17 sell signal.This is a shadow over the markets.
The CBOE Put/Call ratio came in at 1.15 on 8-5. A consistent string of low readings can bea sign of excessive optimism and often signals a top in the markets. Readings below 0.5are 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 a closing basis.
The CBOE P/C ratio for indexes rose to 2.77 on 8-5 after a 2.37 reading on 8-4, after areading 2.13 on 8-1 and a nice 2.30 on 7-21. It was not quite the 2.89 on 7-18 ,or the2.50 on 7-6 or 2.10 on 7.1. But, four such readings in a space of a few weeks, explain thecurrent rally quite nicely. Readings below 0.9 suggest too much bullish sentiment, just asreadings above 2 are usually required to mark major bottoms.
The VIX and VXN had readings of 12.88 and 15.40 on 8-5. These remain fairly low andcautionary readings, and have been drifting lower lately. When these indexes begin torise, it is a sign of concern as rising volatility indexes suggest that an acceleration ofthe prevalent trend is on its way. A fall near or below 20 on VIX and 30-40 on VXN isconsidered negative, a fact that is usually confirmed when the volatility indexes begin torise. Readings above 40 and 50, respectively, are often signs that a bottom may be closeto developing.
The futures traders polled by Market Vane registered a 68% Bullish consensus We are stillon a sell signal here.
Our Big Trend Model fell to a reading of 45, after its oversold reading of 32.5% on 7-1.The index had a very accurate oversold reading of 12.5, delivered on 4-29-05, a correctcall on the recent bottom. Readings near or below 40% often precede market bounces, butmay initially be signs of caution when markets have had a rally. Readings above 80% areusually bearish. The Big Trend Model is composed of technical and monetary indicators andupdates automatically on a weekly basis.
Our MASI indicator is negative. MAGI gave a buy signal on 4-22, which is now reversedafter 6-17. When these two indicators agree, the market usually follows in the directionof the signals. MAGI is based on the weekly data provided by Investor’sIntelligence’s poll of newsletter writers, a group that has been bullish for severalyears, and stayed bullish, and wrong throughout the bear market. When both indicatorsagree, there is a high degree of correlation with a significant market move. When theseindicators disagree, it is often a sign that the market is about to go nowhere but thatvolatility is on the verge of increasing. MASI buy signals when MAGI is bearish are rarelyworth acting on. MAGI is an intermediate term indicator with an excellent predictiverecord. The best market bottoms occur when both of these indicators are both on buysignals, a telling sign of intense fear on the part of investors. MASI and MAGI aresentiment indicators that are up dated on a weekly basis.
The NYSE insiders were increasingly bullish, as they were strong buyers of stock on theweek ending July 22. They had been heavy sellers of stock for eleven out of thirteen weeksuntil 7-22. We’ll see if it lasts. Short selling by NYSE specialists remains near alltime lows by historical standards, since we‘ve been keeping this indicator. Thisindicator is very positive when short selling by the specialists is low as the same timethat they are net buyers of stock. The heavy amount of selling over the last few monthshas turned this indicator neutral. This is a set of very smart investors, and when theyturn positive or negative, it is just a matter of time before the market follows. Specdata is released to the public with a two week lag, so is not useful as a market timingtool, but is excellent background and confirmatory information.
MarketMoves
Housing Stocks Get Clobbered By Higher Rates
Centex (NYSE: CTX) and Toll Brothers (NYSE: TOL) delivered short to intermediate term sellsignals last week.
The housing market did not like rising bond yields and comments from the Fed that ratesare going higher.
Chart Courtesy of StockCharts.com
Centex is a diversified home builder, that also does commercial construction, making theaction in the stock important as a bellwether.
The stock closed below the 50 day average on Friday, and has the potential to fall to 61,where its 200 day moving average is providing support.
Chart Courtesy of StockCharts.com
Toll Brothers is an upscale builder, and tends to be among the last of the housing stocksto roll over, due to its premium clientele.
But Toll also closed below its 50 day moving average, and could fall to the 39 area.
Conclusion
The connection between the bond market and the housing stocks is as important as ever now.Further trouble in the housing sector could be a prelude to more trouble in the financialmarkets.
Conclusion
Software and related sectors could be signaling a return to a better climate ininformation technology.
Chart Courtesy of StockCharts.com
The Amex Biotech Index (BTK) continues to act well. The index delivered a major break outon 7-20, but could have some difficulty in the short term. On 7-18 and 7-19, it remainedthe strongest sector int the curren market closing above 600. The 570-590 area is nowsupport. Visit our health and biotech area for more details as new stocks have been addedour buy list.
Chart Courtesy of StockCharts.com
The Amex Pharmaceuticals Index (DRG) is still showing some improvement. The index istesting the 330 area, but looks to be building a base. For a full description of the insand outs of investing in biotech and pharmaceutical stocks check out our book "
Chart Courtesy of StockCharts.com
The Philadelphia Semiconductor Index (SOX) fell back on 8-5. A sustained close above 480would be very bullish for the chip stocks. For trading info on technology stocks visit ourStock of the Day and Technology timing sections.
Chart Courtesy of StockCharts.com
Small stocks got clobbered on 8-4 and 8-5, a negative for the markets. For tradingsuggestions in the small cap arena visit our S & P trading page featuring our ETFtrading model for small caps.
Disclaimer: The financial markets are risky. Investing is risky. Past performance does notguarantee future performance. The foregoing has been prepared solely for informationalpurposes and is not a solicitation, or an offer to buy or sell any security. Opinions arebased on historical research and data believed reliable, but there is no guarantee thatfuture results will be profitable.
