 | Dallas, TX
August 13, 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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Supbrime Fallout: What's Next?. Oil & Commodities: IEA Stans Pat On Demand Forecast. Stocks: Watching For A Market Turn
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 | What's Hot Today: | |
Investors will be sending the world's central banks one simple message over the next few days: You did enough, or we want some more..
Today's Economic Calendar: 8:30a.m. July Import Prices. Expected: +1.0%. Previous: +1.0%. 2:00p.m. Federal Budget Statement. Expected: -$34.5B. Previous: +$27.48B. Sources: Wall Street Journal.com, Marketwatch.com.
News For Thought
Pakistan and Afghanistan agreed to forge better relations. Presidents Pervetz Musharraf (Pakistan) and Hamid Karzai (Afghanistan) held direct talks and agreed to set up further forums between the two countries in the near future.
Former Mass. Governor Mitt Romney won the Republican Iowa straw poll with 31% of the vote. Rudy Giuliani, the Republican front runner in most polls was absent from the poll.
Al Qaeda raises threat of radioctive attack on New York and Miami. According to Debka.com: 'The threat was picked up by DEBKAfile’s monitors from a rush of electronic chatter on al Qaeda sites Thursday, Aug. 8. The al Qaeda communications accuse the Americans of the grave error of failing to take seriously the videotape released by the American al Qaeda spokesman Adam Gaddahn last week. “They will soon realize their mistake when American cities are hit by quality operations,” said one message.' Another said the attacks would be carried out “by means of trucks loaded with radio-active material against America’s biggest city and financial nerve center.” According to Debka, New York City raised the alert level for one day after the report, but decreased it after one day at the heightened level.
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| Supbrime Fallout: What's Next? | |
 | | Post Injection Blues Or A Real Rebound? |  | |
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If the financial markets were patients having undergone an emergency operation, the surgeons would be sitting by the bedside on pins and needles, just waiting for the patient's next move.
That means that investors, central bankers, and politicians have to be on the lookout for the next move, with the real threat being whether the situation will extend to the real economy.
There are many ways of exploring the situation. One of them is just by going out and seeing what people are doing. So, being the adventurous types, on Saturday night, we ventured to the Smirnoff Music Center in Dallas, and saw a crowd of 15,000 baby boomers, teenage and toddler kids in tow, take in the latest tour stop of Canada's venerable Rush.
The Canadian power trio delivered two sets of old and new songs, to the joy of the highly charged crowd, who seemed oblivious to the subprime situation.
So, either the regular Joes and Irmas of Middle America are oblivious to the subprime disaster, or it hasn't hit home yet. Judging by the energy and noise of the crowd, the only thing that mattered was the show.
And why not? The world is swimming in money. As of August 10, the Fed has added $62 billion in reserves to the U.S. money markets, the largest amount since the post 9/11 stock market crash and tragedy when it added over $81 billion in one day.
As of Thursday, global central banks had added over $320 billion to their respective banking systems.
We've had a lot of questions as to what the Fed does when it adds liquidity to the markets, so here goes, while we add that Chapter 2 in "Futures and Options For Dummies" covers the subject well.
The Fed, when it wants to add liquidity to the market, buy's bonds from banks, and in that fashion, adds to the banks' reserves, with the intent being that the banking institutions then have more money to lend.
In this case, the Fed presumably bought bonds, at least, from the likes of Washington Mutual (NYSE: WM), one of the companies that recently reported that it was having liquidity problems related to the subprime mess.
The intent is two-fold. First, the Fed wants the bank to make it easier for clients to borrow money. And second, the central bank wants to make sure that the banking system can cover routine withdrawals from clients.
When we visited our local bank on Friday, there was no sense of panic, and we had no trouble withdrawing money.
So it took Mr. Bernanke a little while to figure it out, but he seems to be getting in the groove of doing the right thing, by putting money in the system and by letting the market know that the Fed is willing to be helpful in order “to facilitate the orderly functioning of financial markets.”
Yet, the debate rages, with some calling for an ease in interest rates, count us in on this side, and others saying that the "reckless" lenders and borrowers of the subprime debacle should be made to pay for their blundering and their greed.
Unless, we're missing something, though, those who are going to get hurt are already paying the price. So why make the rest of us go down with the less than savvy who conconcted the schemes, and those who fell for them?
One recently loud voice was the usually bullish Ed Yardeni, who in his morning note recently wrote: "The notion that the Fed shouldn’t bail out Wall Street and the hedge funds is ridiculous. There are too many innocent bystanders for the Fed to stand by.”
And the market is starting to bet on a Fed ease at some point in the future. According to Investor's Business Daily: "Fed funds futures have fully priced in a quarter-point rate cut in September — with a 40% chance that the Fed will cut rates by 50 basis points. On Wednesday, there was only a 25% chance of a quarter-point cut."
Conclusion
The cat's out of the bag. The subprime situation has now been acknowledged by the world's markets, and the world's central banks as being significant.
The usual cure for a market crash, an infusion of liquidity by the world's central banks, and the announcement that there is more to come, has been made.
That means that the next move is to see what happens next. The next two weeks or so will be very interesting.
And in case anyone is wondering, Rush's performance wasn't too bad, despite their rising age, which is of comfort to all of us who are climbing that ladder.
And quite appropriately, as the band notes in its hit song "Circumstances:" "The more things change.. The more they stay the same."
We'll be on the road this week, but will be updating IQ every night, with road reports in a series titled: "Duarte Accross America."
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 | Oil And Commodity Summary: | | Prices Steady After Central Bank Moves
Crude oil, natural gas and gasoline prices stabilized at the end of last week, as the injection of money into the banking system by global central banks opened up the credit spigots.
The major fear of traders is that a global economic slump will decrease demand while OPEC and non-OPEC countries have been pumping oil full tilt for months.
That would set up the potential for a nearly immediate glut of crude and send prices tumbling.
So far, though, the market has held up, at least on an intermediate term basis, as crude has remained above $70.
Natural gas has gained some footing of late, as hurricane season kicks into what is traditionally its most intense season.
The International Energy Agency has reiterated its demand forecast, saying that the subprime problems are not going to affect demand for oil.
Some weather forecasters are suggesting that as temperatures increase in the month of August, so will the chances of new storms in the Atlantic. There has been no storm damage to oil installations in North America this year, so far.
For now, it remains a good idea to start looking at oil and natural gas stocks again. We have added some new positions in oil service in our energy section, along with several alternative energy stocks. Visit our energy section for details.
Crude still has support at the $70- $75 support level.
Natural gas is trying to put in a bottom, and should be watched carefully, as the heat wave has returned to the U.S.
And yes, we are looking for stocks to add to our list but have yet to find any large quantities after our portfolio was essentially stopped out after the major selling hit over the last few weeks.
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 delivered a negative looking reversal on 8-10.
Chart Courtesy of StockCharts.com
Crude oil prices are stabilizing after trying to stabilize just below the $75-$80 trading band.
Chart Courtesy of StockCharts.com
The Philadelphia Oil Service Index (OSX) has been very volatile of late.
Chart Courtesy of StockCharts.com
The Amex Oil Index (XOI) gave back 13% of its gains in the recent correction, and remains volatile.
Disclosure: Dr. Duarte has open positions in oil and natural gas stocks and exchange traded mutual funds.
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| Technical Summary: | |
Watching For A Market Turn
Last week we asked "how much money does it take to make a stock market stop falling?"
The answer is still up in the air, although the global central banks, as of last Friday, 8-10, had already pumped in some $300 billion.
So, again we ask. Where are we? Nobody really knows, although, the major indexes did slow their rate of descent on 8-10, after the Federal Reserve pumped in another installment, raising its total above $50 billion.
What should we do? Nothing has changed here. Be vigilant, and expect the bottom to come when no one expects it, and be ready to capitalize by buying the strongest stocks possible.
For now, though, investors should weigh every financial decision very carefully, as the potential for a daily dose of nasty surprises is clearly apparent.
The S & P 500 is still testing its 200-day moving average, but the market's breadth and momentum still need some time to heal, as investors are forced to assess risk on a daily basis, often in dramatic fashion.
That's why any return to the stock market, should be cautious and very selective.
In fact, at this point, any return should be on a stock by stock basis, rather than on a sector by sector basis.
The NYSE advance decline line, and the number of stocks making 52-week highs remain in down trends, which means that no matter what the indexes do, the average stock is now more likely to be in a down trend than in an up trend.
When breadth and momentum falter, the net effect is, more often than not, eventually negative even for the major indexes.
Another 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 were out 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, putting some cash back to work may be worthwhile, as long as we remain patient and acknowledge that we may be early in stepping back into the market.
In other words, be patient, and study any stock picks carefully before jumping in. 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
Take small risks. Be selective. And remain patient and cautious.
Wait and see what develops. Don't be in a hurry. Build a shopping list of stocks and be ready to use it when the situation is right.
If you're making 5% in money market funds and T-bills, you're not getting a bad deal right now. Kick back and let things unfold before taking big chances.
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: | | No Significant Change In Put/Call Ratios
Fear gauges are still at levels that might be considered bullish, but for now, the bears are still making money.
The CBOE Put/Call ratio closed at 1.10. 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 1.84. 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 28.30 and 26.84. 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 were slight buyers in the latest week. This may or may not be significant, as the amount of buying was not particularly impressive and it did come just before the end of the month, a usually bullish seasonal period.
This group of investors has been selling since Memorial Day. This pattern of activity clearly predicted the recent selloff in stocks, so a reversal, if it comes, could be a bullish development for stocks later this year, as it takes some time before specialist behavior reflects the performance of the markets.
Market Vane's Bullish Consensus was at 58% on August 3, remaining 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 | |
Watching Goldman Sachs For Clues
Goldman Sachs (NYSE: GS) is trying to find a bottom, and its actions could have significant repercussions on the market.
Chart Courtesy of StockCharts.com
As Goldman goes, so does the market. And lately, Wall Street's biggest investment bank has been getting hammered.
In fact, Goldman stopped making new highs way ahead of the Dow's push toward 14,000, a fact that we pointed out here as possibly being a signal that trouble might be ahead for the market.
Goldman topped out just after Memorial day and has given back some 29% since then as of August 10.
Goldman is the bellwether for investement banking, both IPOs and mergers and acquisitions. Goldman's failure in June might be seen as the smart money bailing out prior to the recent liquidity crunch.
If Goldman can hold above the 170-180 range, it might be a good sign for the markets in the future. | | | | |
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