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 | Dallas, TX
August 6, 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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Time To Make A Stand. Oil & Commodities: Economy Worries Oil Patch. Stocks: Technical Damage Evident But Not Definite
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 | What's Hot Today: | |
Traders will be watching to see if the rally in the pre-market futures will hold. Chances are not better than 50-50.
Today's Economic Calendar: No economic indicators scheduled for release. Sources: Wall Street Journal.com, Marketwatch.com.
News For Thought
Mortgage problems are starting to spread beyond supbrime, as the industry starts to tighten lending standards, raise interest rates, and increase the difficulty of refinancing. The overall effect is likely to be the lengthening of the current liquidity crisis on Wall Street. | |
| Time To Make A Stand | |
 | | Ben's Got The World In His Hands |  | |
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The bulls and the bears will be making their stand over the next few days, with the Federal Reserve's meeting on Tuesday likely defining the rest of the week, and perhaps the rest of the summer.
As the Dog Days of August near, the potential for thin volume exaggerating the market's moves will rise, although there is no guarantee of the direction of the markets.
Yet, as last week's action proved, volatility is the common theme of the current markets.
There is now a laundry list of worries to consider, and all of them are sensible within the parameters of what's now in full swing, the unwinding of the real estate and funny money mortgage bubble.
Last Friday's weaker than expected employment report, which our stock market trio, Manpower Inc., Administaff, and Monster Worldwide correctly predicted, might be the centerpiece of what's begun to happen.
If fewer jobs are being created, and jobs may be starting to be lost, then the already squeezed consumer, as indicated by the rise in foreclosures, and the somewhat sluggish pace of retail sales, is now the next potential shoe to drop.
In fact, retailers are starting to wring their hands, and are fret about the potential for the back to school season being a bust.
According to Marketwatch.com, citing an American Research Group survey of parents with regard to the back to school season: '48.7% plan to keep back-to-school expenses to a minimum. Of those, an overwhelming 90.3% said this is because they have "less money." '
In fact, according to some Wall Street sources, the discounting has already begun, with Wal-Mart and Target, slowly but surely delivering promotions and cutting prices.
Another set of developments that is starting to squeeze consumers, is the rise in interest rates, and the tightening of lending standards by banks, leading to a decrease in home equity loans for financing of other purchases, and also squeezing the housing market on all ends.
According to the Wall Street Journal: "In what would strike most people outside the industry as a return to common sense, lenders now are shunning would-be borrowers who can't make a down payment, prove that they have a reliable income and show a record of reasonably regular bill-paying. They also are turning down refinancing requests from many people trapped by adjustable-rate loans that are proving too expensive after the initial feel-good period of low payments."
hings are happening so fast that one source told the Journal that "this week" was going to be "a mess" as "lenders are scaling back so fast that it isn't clear which loans are available or on what terms, and rates are jumping even on large loans, known as jumbos, for prime borrowers."
Another source told the Journal that the market is now in "a panic" and that it cold take months before things settle down.
If you're looking for a figure to hang your hat on, one estimate is that due to tightening lending standards, some "10-15%" of those who could buy a house with last year's lax lending standards in play, are now being shut out of the market.
And this might be the set of statistics that clinches things, according to the Journal: "The National Association of Realtors counts about 4.2 million resale homes for sale, along with more than 500,000 new homes on the market. That is enough to last about 8½ months at the recent sales rate; a supply of five to six months generally is considered balanced. Foreclosures will add to the supply. Moody's Economy.com has estimated that 2.5 million homeowners will default on their mortgage loans this year and next. Some will be able to keep their homes, through "loan modification" agreements that reduce payments or through various refinance packages offered by lenders and state rescue programs. But about 1.7 million of them will lose their homes to foreclosure, the research firm projects."
Conclusion
Few at the Federal Reserve, inside the beltway, or the campaign trail want to admit it, but the U.S. is on the cusp of a world class liquidity crisis.
This is the same kind of crisis that led to the FDIC bailing out of the U.S. banking system in the 1980s, although it may not be to the same degree, at least not yet.
The basic elements, though, are still the same. Too many tricky loans were made to those who could not possibly pay for them under any but the most ideal of circumstances. As long as money was easy enough, nobody got hurt.
But, when the terms of the loans got tight, which happened just as the Federal Reserve hit the last one or two interest rate increases of its tightening cycles, the wheels started to come off.
Sure, first it was the fringes, with anecdotal evidence suggesting that illegal aliens and other high risk borrowers were starting to default.
But, now, lending standards are apparently on the verge of starting to squeeze even the jumbo mortgage market.
That means that one of two things is about to happen. One could be that this is the bottom, and that we have seen the panic button hit. That would be good, since panic is often the prelude to opportunity.
The other possibility, though, is that this is just the beginning, and that more trouble is coming.
As we saw with Enron and Worldcom in the 1990s, and with Michael Milken and the junk bond mess of the 1980s, it could take months, and even years before these things completely unwind.
Which, of course, brings us to the Federal Reserve, and their meeting Tuesday. When Alan Greenspan was at the helm, Wall Street got used to the Fed lowering interest rates if the financial markets crashed.
Greenspan, though, was a capitalist at heart, and as we have pointed out here multiple times, an avid chartist and technician, who understood the importance of support and resistance levels, as well as how the market and the economy eventually meet at the end of the day.
Bernanke, on the other hand, seems to be all about talk, and ahdering to inflation targets, similar to the European Union, and its socialist tendencies.
If the Fed decides to turn left, instead of moving toward a Greenspan like direction, we could see more pain, in a hurry. | |
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 | Oil And Commodity Summary: | | Economy Worries Oil Patch
Oil, oil service and natural gas stocks tumbled with the market on Friday, and crude and natural gas prices gave up more ground overnight, as the potential for an economic slowdown in the U.S. are putting some fear in the energy markets.
It's well recognized that higher oil prices eventually dampen economic growth. But what is not known is what can happen when persistently high energy prices combine with a full blown meltdown in the U.S. mortgage market.
And that may be what is about to develop, as last week's employment report, and other signs of a slowing economy in the U.S., start to bleed into the overall global economy.
The potential for slowing demand, just as supply channels are starting to improve, such as refinery capacity, may be a one-two punch for an oil industry that is already flying at full capacity.
With natural gas reservoirs under airports, such as Dallas' DFW, and with full blown exploration in places long abandoned, such as what we witnessed this weekend as we drove back from West Texas, the oil industry could be getting set up for one of those glut scenarios, and a slowing.
But, a whole lot has to happen in a short period of time, and it may never come to pass.
In other words, the economy has to completely collapse, if oil is going to fall to the $40 per barrel level. For now, there is no sign to suggest that.
Crude still has support at the $70- $75 support level.
Natural gas is trying to put in a bottom, but continues to disappoint.
Being very careful in the energy sector at the current time remains the best strategy, given the potential for daily price swings.
Our overall strategy, managing each position individually, has paid off, and remains our policy at this moment.
Chart Courtesy of StockCharts.com
The Wilderhill Clean Energy Index is holding up better than the S & P 500 for now, as it has yet to fall below its 200 day moving average.
Chart Courtesy of StockCharts.com
Crude oil prices are weakening but remain within the $75-$80 trading band.
Chart Courtesy of StockCharts.com
The Philadelphia Oil Service Index (OSX) is starting to get worn out, and could remain weak over the next few days.
Chart Courtesy of StockCharts.com
The Amex Oil Index (XOI) has fallen hard in the last few days, and is trying to put in a bottom. | | | | |
| Technical Summary: | | <!------ start Technical Summary text only ------>
More Technical Damage
The S & P 500 fell below its 200-day moving average, for the second time in the last couple of weeks, which could mean that either more trouble is coming, or that a bottom is put in place.
No double talk intended. It's just that kind of a spot for the market, where things could go either way.
A whole lot depends of what the Fed says and does when it meets tomorrow, although it would not be a good idea to get our hopes up for something useful coming out of the central bank.
Bernanke just doesn't inspire as much confidence as Greenspan did. And of course, that may change at some point. Yet, he has had plenty of chances so far, and has mostly avoided the opportunities.
One way to avoid all the recent volatility is to be very selective as to when you decide to enter the market, such as with our seasonality trading system.
Seasonality traders should have bought into the market at the open on 7-31, and should sell at the close on 8-3.
Our seasonality trading strategy, is a mechanical model, which capitalizes on the statistical chances of the market rallying at certain times during the year.
One reason for the success of the strategy is the fact that institutions, such as mutual funds and pension plans, tend to put new money into the market at the start of a new month.
For now, though, it's a good time to be sitting on mostly cash, and to wait, as the market made new lows on Friday.
It often takes 4-7 days after a major bottom before the market delivers a follow through day, a day in which stocks rally in higher volume, and positive breadth. That is usually the signal that the trend has turned up.
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
Wait and see what develops. Don't be in a hurry. Build a shopping list of stocks.
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: | | Fear Rises On Dark Friday
Put option buyers were busy on Friday. Yet, this is by no means a sign that a major bottom is forming, as volatility remains high, and prices are still falling.
The CBOE Put/Call ratio closed at 1.47. At some point, if the current type of numbers continue, the odds tilt toward a bottom forming.
The CBOE P/C ratio for indexes checked in at 2.71. 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 25.16 and 24.42. 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 sold again. on 7-20 confirming our suspicion that the market's smartest guys were selling into the Dow 14,000 hype, and adding to our worries that this isn't over yet. More interesting is the fact that short selling by these folks is at a minimum, yet over the same period of time, put option selling on indexes, where big money hedges has been on the rise.
This makes it six out of the last seve weeks, of overwhelming selling by NYSE specialists since Memorial Day. 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 56% on August 3, and has been falling, but is still above the 40% that often marks meaningful market bottoms. The UBS sentiment index fell to 87 in June from 95 in May and is starting to increase its distance from the reading of 103, registered in January. This sentiment measure is also too high to suggest that a major bottom is forming.
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| Market Moves | |
Spyders Broke Below Key Support
The S & P 500 Spyders (AMEX: SPY) fell below their 200-day moving average on Friday.
Chart Courtesy of StockCharts.com
Spyders can be useful market timing and short term trading vehicles, as they essentially mirror every move of the S & P 500.
Yet, as the market fell on Friday, so did the Spyders, suggesting that unless you are a savvy short term trader who can sell stocks short, a good place to be for a while might be cash.
Remember, most of the rally that took place on 8-1 and 8-2 came late in the day, suggesting that program traders were involved.
On those days, the program traders took prices higher. But on Friday, 8-3, the same thing happened in reverse, as late day selling took hold and the market fell.
Since these traders like to move baskets of stocks, the Spyders are an ideal vehicle for riding their coattails, both on the long and short side.
The Spyders are liquid, and can be shorted if you desire.
If you are adroit, this is not a bad way to trade this volatile market.
Dr. Duarte trades Spyders and was long SPY when he wrote this article. | | | |
