Dr. Joe Duarte's Market I.Q.
The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy ForTraders and Investors
Greenspan: Rising Risks "Disturbing". Oil &Commodities: $60 Now Key Support. Stocks: Nasdaq On The Hot Seat.
Pre-Market Summary:
Traders are going gaga over the latest round of private equity takeovers.
Today's Economic Calendar: 10:30a.m. Feb Dallas Fed Mfg Production Index. Previous: 13.8.Sources: Wall Street Journal.com, Marketwatch.com.
Greenspan: Rising Risks"Disturbing"
Few Listen To Alan Greenspan Anymore
Former Federal Reserve Chairman Alan Greenspan thinks a recession is ahead and thatinvestors are too complacent with regard to risk, says the Wall Street Journal. But, sincehe's no longer in charge of the interest rate "red button," few are payingattention to his remarks anymore. That may prove to be a risky proposition in the currentmarketplace.
Greenspan's remarks are more prophetic given the recent announcement of a $32 billionprivate equity financed takeover of TXU (NYSE: TXU) as reports are also surfacing about apossible $54 billion takeover of Dow Chemicals (NYSE: DOW).
Mr. Greenspan, almost as famous for his "irrational exuberance" comments as forhis nearly twenty year stewardship at the Federal Reserve, was speaking to a satelliteconference last week, and according to the Wall Street Journal 'responded to a questionabout the U.S. economy by saying it was "possible" that it would go intorecession by the latter months of 2007, though he said it is difficult to predict thetiming of any recession.'
Greenspan added: '"When you get this far away from a recession, invariably forcesbuild up for the next recession, and indeed we are beginning to see that sign, for examplein the U.S., profit margins ... have begun to stabilize, which is an early sign we are inthe later stages of a cycle," he said. "While, yes, it is possible we can get arecession in the latter months of 2007, most forecasters are not making that judgment andindeed are projecting forward into 2008 ... with some slowdown."'
In what were wide ranging comments, the former Fed Chairman also noted that "the U.S.and global economies are far more resilient now than before due to economic and financialshocks, and said that rather than predict when the next shock would occur, policymakersshould create an environment where economies are capable of absorbing unforeseenevents."
And perhaps the most telling statement, reminiscent of his "irrationalexuberance" comments, Greenspan told the audience: '"We have extraordinarily lowrisk premiums now. Risk is no longer perceived as major risk, at least as it was in yearspast and that, I must say, I find disturbing," he said. "We do not and cannotlook into history without being very concerned when you see the absence of awareness andconcern about risk that we see today."'
Greenspan's comments are interesting, not just because Greenspan said them, or because themarket didn't crash after he made them, which is what might have happened if he utteredthe same words while he was still at the Fed.
What makes them more interesting is the timing. First, the private equity mania continues,with larger and more aggressive deals getting done on an almost daily basis. Second, theFederal Reserve is looking at the economy in slightly different terms these days.
According to Greg Ip, the Wall Street Journal's well connected Federal Reserve reporter,the Fed doesn't think that there is a direct link between unemployment and inflation anymore. More specifically, "The Fed's staff estimates it takes up to twice as muchadditional unemployment to achieve a percentage drop in inflation as it did before1984."
Ip's conclusion is even more startling: "That's one reason the Fed, though it expectscore inflation to ease this year, isn't relaxing. With unemployment currently 4.6%, at orbelow the Fed's view of its natural rate, inflation may edge up after the temporaryimpacts of energy and rent subside. That could require the Fed to raise interest ratesenough to push unemployment up sharply and bring inflation down."
According to Ip's report, the Fed is looking at current inflationary pressures as beingtemporary, with rising rent and oil prices not quite being permanently factored into theinflationary equation by the public, whose expectations for inflation are still tempered.'Fed Chairman Ben Bernanke echoed that sentiment earlier this month, saying the public'sexpectations will determine whether temporary factors like changes in rents and oil prices"leave a lasting imprint" on inflation: "It is encouraging that inflationexpectations appear to have remained contained," he said.'
In other words, the Fed now thinks that if inlfation persists, it would take a moreaggressive round of interest rate cuts than in the past to wring out the excesses ofinflation, if they are not temporary.
Conclusion
Greenspan thinks that a recession is within the realm of possibilities. The FederalReserve is thinking that the relationship between inflation and unemployment is no longera reliable indicator of when to stop raising interest rates.
And private equity investors are apparently insatiable in their appetite, and why not,with the entire Wilshire 5000 index as a potential field of acquisitions in the future.
The weak link in the chain is that the whole scenario is based on liquidity. The Fed hassapped a significant amount of liquidity from the system with its previous interest rateincreases. But, there is clearly a whole lot of money still sloshing around the system, aspetrodollars are being recycled, and the fruits of recent megadeals are finding new homes.
Goldman Sachs continues to form private equity partnerships, and lenders are apparentlynot having any trouble loaning money to big funds for bigger and bigger deals.
But, we return to the key statements from above. Greenspan is looking at economic weaknessin the future, and the Fed is looking at being more aggressive in its next round ofinterest rate increases.
The two viewpoints are incompatible, as is the viewpoint that the current private equityboom can last forever.
The Fed is feeling pretty confident these days. After all it busted the housing bubble andonly the fringe players in the sub-prime mortgage sector ahve taken a hit.
What's to stop the central bank from thinking that it can be just as lucky with thecommercial real estate market and the private equity bubble?
Oil And Commodity Summary:
$60 Now Key Support
A subtle change has developed in the oil markets, as $60 is now key support, instead ofresistance. This is a key flip-flop, which suggests that the burden of proof is now withthose betting against higher prices and that the trend has turned up.
Oil remained above $61 overnight as traders are now coping with trying to hadicap gasolinesupplies in the face of a persistent winter storm season in the Northeast U.S.
Adding fuel to the fire is the situation in the Straits of Hormuz, where nearly 40% of theworld's oil supply passes on its way to the market. Iran has been holding frequent wargames in the near vicinity of this area, and reports of a rising U.S. naval presence inthe Persian Gulf are no longer the premise of intelligence web sites.
The situation in Iraq remains fairly unstable as Iraq's President and Vice-Presidentrespectively met illness and suffered minor injuries in a bombing attack over the weekend.
And all of this is happening as Nigeria continues to unravel and the situation betweenIran and the U.S. continues to heat up, with reports of Israel allegedly makingpreliminary preparations for an attack on Iran. Israel denied the reports.
The bottom line is that the geopolitical premium is once again being factored into theprice of oil, and as a result the price of crude is now above the recent range of $55-$60,and could be headed to the $65 area.
Oil and oil service stocks are mixed with the latter starting to show more signs of life.Visit our energy section for new stock picks.
Technically, $60 remains key chart point for crude. A sustained move above $60 could takeprices to $65 in a relatively short period of time, given the amount of volume generatedin trading of late. $55 is now key short term support.
The Amex Oil Index (XOI) and the Philadelphia Oil Service Index (OSX), are both startingto move.
The best approach at this point remains to be both patient and selective, and to starttaking some profits where positions are stalling.
The metals markets is getting volatile, but could again provide some up side.
Gold is starting to pull away from $650, an interesting development.
Steel stocks continue to show some strength, along with aluminum stocks. See our gold andmetals section for stock recommendations.
Chart Courtesy of StockCharts.com
The Wilderhill Clean Energy Index is trading above the 190 area, a recent positivedevelopment. Some stocks in the sector are acting fairly well. See our energy area forideas in green energy.
Chart Courtesy of StockCharts.com
Crude oil prices again had trouble at $60.
Chart Courtesy of StockCharts.com
The Philadelphia Oil Service Index (OSX) has moved above 200.
Chart Courtesy of StockCharts.com
The Amex Oil Index (XOI) made a new low on 1-10, but has since bounced back. 1200 is stillthe key chart point.
Technical Summary:
Chart Courtesy of StockCharts.com
Nasdaq In The Hot Seat
The Nasdaq Composite has quietly climbed to a five year high, as the semiconductor sectoris threatening to once again become a force in the market.
Meanwhile the Dow Jones Industrial average and the S & P 500 have slowed their recentadvance, as the small stocks have also come to life.
But under the surface there is some concern, as the NYSE advance decline line ended lastweek a bit flat, despite the nice run on the Nasdaq, a possible warning sign of weaknessin the future. It's early to get too worked up about this, but it is important to watch.
We've also been noting some weakness in the REIT sector, and have added several shortpositions in the REIT sector which can be found in our Fallen Angels section. We suggestcaution in short selling any sector, but especially the REITs, which have had a history ofquick corrections and a return to a rising trend over the last few years.
Otherwise, there are still opportunities on the long side, as our Fallen Angels and GrowthStock portfolios have established a decent group of core holdings that have withstood themarket's recent volatility. We're looking to add to that core. Check each section dailyfor updates.
From a longer term stand point, based on historical trends, this should be a positive yearfor stocks, given the fact that it's the third year of the Presidential Cycle, which callsfor rallies in the third and fourth years of a presidency.
Our long term forecast remains upbeat, unless the major indexes fall convincingly belowtheir 200 day moving averages.
What To Do Now
The energy sector is again showing signs of life, and should be looked at seriously in theshort to intermediate term. See our energy section for new picks in both traditional andgreen energy.
The REIT sector has been weakening and is worth a look if you're an aggressive trader withexperience shorting the market.
Remain patient, selective, and vigilant. Above all, stick with what's working, which inthis market, could vary from day to day.
Focus on strength, but don't fall in love with any particular stock, as news could hit anyposition hard during times such as the current ones.
The Fallen Angels, have remained a very steady portfolio, as has our growth stock section.Look for ideas there, but don't ignore energy, metals, and all our ETF models.
Visit all our individual sections, both our ETF and individual stock picks daily for newideas, and changes to open positions.
Now, more than ever, it pays to be careful in any market. So, be very methodical aboutmonitoring portfolios, adhering to trading rules, and ratcheting up sell stops is clearlystill here.
If the market turns south, your chances of preserving your profits by following a soundtrading plan, such as outlined above will increase.
Second guessing decisions, and hoping that things will turn out o.k. in the long haul, isthe recipe for disaster at a time like this in the market.
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
Sentiment Summary:
Fear Goes Off The Board
Option players hit the panic button over the weekend with put/call ratios rising on bothindividual stocks and indexes. The action was little changed on Thursday. This may be ashort term positive, or a sign that somebody with inside knowledge is putting on a bighedge. We'll have to see what develops.
The index put/call ratio was nearly 4.0, which is very rare. Frankly, we're not sure whatto make of these readings other than to note them and wonder what somebody with big bucksthought they knew on Friday. We'll be watching the situation carefully.
STill, longer term indicators continue to suggest that market sentiment is nearing levelsof significant caution.
The UBS sentiment index, see below, rose to the highest number we can recall in January,setting a very cautionary tone in the market.
The CBOE Put/Call ratio checked in at 3.87. A consistent string of low readings can be asign of excessive optimism and often signals a top in the markets. Readings below 0.5 areof concern, but not as serious as readings below 0.40. Readings above 1.0 are bullish. Thenumbers cited here are meant to be evaluated on a closing basis.
The CBOE P/C ratio for indexes checked in at 1.95. Numbers above 2.0 as the market sellsoff, often lead to rallies. 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 10.18 and 15.30. A fall near or below 20 on VIX and 30-40on VXN is considered negative, a fact that is usually confirmed when the volatilityindexes begin to rise. Readings above 40 and 50, respectively, are often signs that abottom may be close to developing.
NYSE specialists were mild buyers of stock on the week of 2-9, reversing three weeks ofselling. Specialist short selling remained at very low levels, though. Rising shortselling from specialists is usually a very bearish sign.
Market Vane's Bullish Consensus remained at sell signal levels, checking in at 73% on2-23. The UBS sentiment index blasted to 103, a downright scary number, and the highestone we've seen.
Market Moves
KLA Tencor Delivers Momentum Surge
Nasdaq is moving higher without Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL)contributing, as KLA-Tencor (Nasdaq: KLAC) and other chip stocks kick in.
Chart Courtesy of StockCharts.com
Glamour and glitz are giving way to good old fashion hardware in the Nasdaq. Over the lastfew days, old stalwarts like chip equipment maker KLA-Tencor have moved higher asinvestors are betting on a resurgence in teh chip sector.
KLAC broke above 54 on Friday, bucking the generally wishy-washy market, showing somestrength. The stock has climbed 42% since bottoming out last June, and has done it withmomentum style numbers.
Delivering a rarity these days, KLAC has had six straight quarters of rising revenues,while delivering five out of six quarters with rising earnings. The stock still trades at22 times earnings, a bargain for a fast growing momentum stock.
More interesting is the fact that the company has accelerated its stock buy back program.A sustained move above 55 could take the stock to 63.
Chart Courtesy of StockCharts.com
The Amex Biotech Index (BTK) remains range bound. The 780-800 area is importantresistance.
Chart Courtesy of StockCharts.com
The Amex Pharmaceuticals Index (DRG) is still consolidating. 360 is critical resistance.
Chart Courtesy of StockCharts.com
The Philadelphia Semiconductor Index (SOX) finally moved above 480.
Chart Courtesy of StockCharts.com
Small stocks are once again resurging, but are not likely to be areas of relative strenghtif the market rolls over.
