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 | Dallas, TX
July 23, 2007, 08:00 EST |  | Dr. Joe Duarte's Market I.Q. |  |  | | |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Has Globalization Gone Too Far? Oil & Commodities: Another Energy Merger. Stocks: Divergences Persist
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 | What's Hot Today: | |
Stocks will try to bounce back after Friday's bout of selling.
Today's Economic Calendar: No economic indicators scheduled for release. Sources: Wall Street Journal.com, Marketwatch.com.
News For Thought
Italian authorities arrested an imam and several others over the weekend, charging the group with running a "terrorist school," according to the New York Times.
The U.S. government is considering the use of force in Pakistan in order to attack Al-Qaeda operations in the country.
"Harry Potter and the Deathly Hallows" sold over 8 million books on its first day of release. | |
| Has Globalization Gone Too Far? | |
 | | Wealth Disparity Leads To Anxiety |  | |
| Corporate leaders and globalization are pushing some to call for higher tax rates, concluded a Financial Times/Harris poll released over the weekend.
According to the Financial Times: "Large majorities of people in the US and in Europe want higher taxation for the rich and even pay caps for corporate executives to counter what they believe are unjustified rewards and the negative effects of globalisation."
The bottom line seems to be that citizens of developed countries are increasingly dissatisfied with the effects of globalization "they perceive have come from the liberalisation of their economies to trade with emerging countries."
The opinions are more against globalization in the U.S., U.K., Italy and France, than they are in Germany, with the latter having a larger "export base." than the former.
Still, in all five countries, the majority of respondents had a negative view of globalization.
More interesting is the suggestion that the public would like for their governments to raise taxes "those with the highest incomes," while "In European countries, a large majority want governments to go further and to impose pay caps on the heads of companies."
China Exports Pollution
The smog in Los Angeles seems to have a Chinese component, literally, as clouds of pollution, blown accross the Pacific Ocean are increasingly adding to L.A.'s smog problem.
In a recent article, in the Journal of Geophysical Research, atmospheric physicist V. Ramanathan at the Scripps Institution of Oceanography in La Jolla, Calif, reported: "On some days, almost a third of the air over Los Angeles and San Francisco can be traced directly to Asia. With it comes up to three-quarters of the black carbon particulate pollution that reaches the West Coast," according to the Wall Street Journal.
According to Texas A & M researchers, large plumes of pollution, aerosolized by natural phenomenon are "are seeding ocean clouds and spawning fiercer thunderstorms," and leading to both warming and cooling trends.
The Journal added: "Scientists are convinced these plumes contain so many cooling sulfate particles that they may be masking half of the effect of global warming. The plumes may block more than 10% of the sunlight over the Pacific. But while the sulfates they carry lower temperatures by reflecting sunlight, the soot they contain absorbs solar heat, thus warming the planet."
More interesting is the fact that China is a reservoir of both natural and manmade aerosols. The former comes from the sands and dust blown from China's deserts, a natural phenomenon, worsened by deforestation.
The combination of both these phenomenons is creating a cycle that is worse than either industrial pollution or natural dust, and goes as follows: "In an instant, billows of grit can envelope the landscape in a mist so fine that it never completely settles. Moving east, the dust sweeps up pollutants from heavily industrialized regions that turn the yellow plumes a bruised brown. In Beijing, where authorities estimate a million tons of this dust settles every year, the level of microscopic aerosols is seven times the public-health standard set by the World Health Organization."
Conclusion
A complex system, in Physics, is one that is self adjusting.
Simply stated, according to Chaos theory, Chaos is the normal state of things. When things get out of control, they progress into Disorder.
Disorder is then restored back to Chaos by Complexity, which then begins the cycle anew.
Corporate profits, have led to a significant difference in the degree to which the "haves" and the "have nots" are living these days, with the former getting the upper hand in spades, while the latter are not seeing as much of a trickle down effect as theoriticians might surmise.
In countries where the "have nots" have had better opportunities to advance in past cycles, this is starting to become a significant issue, especially if there is a recession under way as the 2008 Presidential election approaches.
Nature, is the most complex system we know.
In the above example, the Earth's climate, is adjusting to the higher levels of dust by increasing the severity of thunderstorms, presumably to clear the excess dust out of the air.
As with all complex systems, the severity of the adjustment is usually proportionate to the activity that is leading to the adjustment.
If we can use nature as a guide, with regard to the Chaos-Disorder-Complexity triangle, we can see that the more successful globalization becomes, the greater the potential for social unrest becomes, as the masses in developed countries look for their own brand of adjustment in response to the Disorder brought on their finances by globalization.  | Oil And Commodity Summary: | |
More Mergers In Energy
Last week, Pogo Producing was acquired. Now, on Monday, Transocean (NYSE: RIG) and Global Santa Fe (NYSE: GSF), two oil service companies are tying the knot in a merger leading to a company with $48 billion in market capitalization.
On Friday, the Oil Service Index (OSX) bucked the market's down trend, as the long term expectations for energy prices remain bullish.
Yet, prices are opening on the soft side on Monday, as the lack of any Atlantic hurricane activity, and thus, the potential for a threat to the Gulf of Mexico's natural gas producing region has fallen.
New sources of natural gas are also coming on line on a regular basis, such as the highy active Barnett Shale in the Dallas, Forth Worth area, and the Independence Hub off the coast of Louisiana -- which was scheduled to launch production at the end of last week.
Yet, overnight prices for natural gas were holding steady near $6.70, and well above the recent support area of $6.35-$6.50, which has held on several occasions over the last few weeks.
The Indepence Hub is located some 110 miles southwest of the Mississippi River and " is expected to send close to 50 million cubic feet of gas a day initially, and ramp up to one billion cubic feet a day, or 1.5% of domestic production, over the next few months."
Natural gas supplies are also in decent shape. According to the U.S. government's Energy Information Agency, in its Thursday supply report, the current status of supply is 16.5% percent above average.
Meanwhile, both gasoline and crude oil supplies fell in the latest report from the EIA. Crude supplies are now some 5.4% above last year's at this time, while gasoline supplies are some 5% below last year's numbers.
Yet, despite the glut of supply in natural gas, there have been buyers willing to take chances when prices drop. For the last few days, buyers have stepped in just below $6.50 on the natural gas futures.
In fact, the natural gas stocks are starting to show some very positive activity, and we've added four possible buy candidates to our energy area.
Still, natural gas prices have started to slip, and the potential for a rally may be fading.
On the other hand, energy stocks have been making a steady string of new highs and remain a viable portion of a diversified portfolio. See our energy section for detials.
Being very careful in the energy sector at the current time remains the best strategy, given the potential for daily price swings.
$75 is the key short term resistance level for crude, while $6.50 is the key support for natural gas.
Our energy section has been updated and still has a core of open positions.
Gold is still range bound, but making some steady progress lately.
Chart Courtesy of StockCharts.com
The Wilderhill Clean Energy Index delivered another price break out on 7-12, but is due for a pullback, especially with the overall market seeming to sour here.
Chart Courtesy of StockCharts.com
Crude oil prices are consolidating with $70 now becoming support and $75-$80 becoming important resistance.
Chart Courtesy of StockCharts.com
The Philadelphia Oil Service Index (OSX) is showing some relative strength these days.
Chart Courtesy of StockCharts.com
The Amex Oil Index (XOI) made a new high recently, but needs a slight rest.
Disclosure: Dr. Duarte has open positions in oil and natural gas stocks and exchange traded mutual funds.
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| Technical Summary: | |
Divergences Persist
The Dow made a new high last week, but the rest of the market, save the chip and oil service stocks, has been fairly soft.
The NYSE advance decline lie is nowhere near a new high, and key sectors, such as banks and brokers are not acting very well.
Yes, we've been writing about the NYSE advance decline line almost every day. And we have asked, why does it matter anyway? After all it's an ancient indicator that few traders pay attention to anymore.
For one thing, very few traders talk about it much, which means that it's a good contrarian indicator.
But beyond that, it has an excellent record of predicting trouble for the market, as in 1987, 1990, 1994, and 1999, just before the dot-com boom imploded.
In other words, several significant market declines were predicted correctly, in the last 20 years, by failures of the NYSE advance decline line to make new highs along with the Dow or other major indexes.
So, is this divergence a big one? Not yet. But, if it does seem to be getting worse, barring a nice three or four day rally that takes the NYSE a-d line to a new high.
That means that we have to be very watchful of the technical state of the market. Volume, breadth, and better sector participation are the things that we want to see.
Also, we stress patience, attention to detail, and risk management.
In other words, as it has been for the past several weeks, the best strategy is to stick with what's working, and give this market time to work out its own kinks, without taking too much of our money away.
Think of alternatives to stocks, such as bonds and the dollar, which are still offering a unique trading opportunity, shorting bonds, and being long the dollar.
Otherwise, be patient. From a longer term stand point, based on historical trends, this should be a positive year for stocks, given the fact that it's the third year of the Presidential Cycle, which calls for rallies in the third and fourth years of a presidency.
Our long term forecast remains upbeat, unless the major indexes fall convincingly below their 200 day moving averages.
What To Do Now
Don't trade just to stay busy or to feel as if you're in the game. Be selective. Follow and review your trading rules. Get a good grip on your own willingness to take risk, and don't push the envelope beyond your comfort level.
Keep a lid on emotion, and stick to your trading rules.
Consider taking some profits where it makes sense, and consider tightening stops where appropriate. Use our individual sections for guidance.
Selectivity remains the key to success. Look for strength, either on a continued basis, or in turn around areas, such as the semiconductors.
Visit all our individual sections, both our ETF and individual stock picks daily for new ideas, and changes to open positions.
Be very methodical about monitoring portfolios, adhering to trading rules, and ratcheting up sell stops is clearly still here.
Second guessing decisions, and hoping that things will turn out o.k. in the long haul, is the recipe for disaster at a time like this in the market.
Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems for the latest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, and technology have also been updated.
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
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| Sentiment Summary: | | Bears Appeared At Week's End
The Put/Call ratio rose at the end of last week, as fairly robust selling took the wind of the market's sails.
The CBOE Put/Call ratio closed at 1.23. A consistent string of low readings can be a sign of excessive optimism and often signals a top in the markets. Readings below 0.5 are 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 checked in at 2.31 Numbers above 2.0 as the market sells off, often lead to rallies. Readings below 0.9 suggest too much bullish sentiment, just as readings above 2 are usually required to mark major bottoms.
The VIX and VXN had readings of 16.95 and 17.49. A fall near or below 20 on VIX and 30-40 on VXN is considered negative, a fact that is usually confirmed when the volatility indexes begin to rise. Readings above 40 and 50, respectively, are often signs that a bottom may be close to developing.
NYSE specialists are still sending worrisome signals. This important chunk of the smart money barely bought stock on the week that ended on 7-6-07, the latest reporting period.
This makes it five out of the last six weeks, of overwhelming selling. The only week of some buying in the last four reported was the week of 6-15, with the week of 7-6 barely making it to the plus column, making it negligible for all practical purposes. This has been a period of significant volatility for the market, despite the highly hyped Dow 14,000 milestone being taken out.
The combination of high put option buying and negative action from NYSE insiders has in the past been a prelude to trouble for the markets.
Market Vane's Bullish Consensus was at 69% on July 20, barely remaining neutral. The UBS sentiment index fell to 89 in June from 95 in May and is starting to increase its distance from the reading of 103, registered in January.
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| Market Moves | |
Time Warner Fades Despite Potter Success
Time Warner (NYSE: TWX) is fading despite the success of its Harry Potter franchise.
Chart Courtesy of StockCharts.com
Wall Street is fickle. Time Warner, theoretically, should be riding high, given the fact that it could have another billion dollar movie, "Harry Potter And The Order Of The Phoenix" on its hands.
Yet, the stock is close to breaking below its 200 day moving average, just a few days after the release of the blockbuster.
And all this comes despite the fact that the company has two more Potter films due out within the next few years.
Judging by the first day sales of the final Potter book, "Harry Potter And The Deathly Hallows," the next two films, including the "Deathly Hallows" should be big box office as well, which means that the Potter franchise is well established, and likely to remain lucrative.
And if J.K. Rowling, the author and creator of the Potter franchise is anything like George Lucas, of Star Wars fame, we may still see more Potter at some point in the future, as Prequels, sequels, and spinoffs, not to mention merchandising, continue to grease the money skids.
So what's wrong with Time Warner? Unfortunately, our auguring tools, were confiscated by the Ministry of Magic' something to do with "You-Know-Who" or something like that.
Fine, removing our tongue from our cheeks, we'll note that Time Warner's current action, may be related to Time Warner, or may have something to do with the market itself.
Usually, when a company's leading product is doing this well, and seems to have longevity, the stock tends to at the very least remain stable.
That means that something out of the "Dark Forest" may be lurking for Time Warner.
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