 |
 | Dallas, TX
August 20, 2007, 08:00 EST |  | Dr. Joe Duarte's Market I.Q. |  |  | | |
 |
The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
| |
After The Rate Cut The Real Work Begins. Oil & Commodities: Gulf May Escape Hurricane Dean. Stocks: Indexes Hold Above Long Term Support
| |
|
 |
 | What's Hot Today: | |
Global stock markets rallied on Monday, one day after the Federal Reserve's surprise cut in the Discount rate. The big question of course is wether this rally has any staying power.
Today's Economic Calendar: 10:00a.m. July Leading Economic Indicators. Previous: -0.3%. Sources: The Wall Street Journal and Marketwatch.com.
News For Thought
Medicare won't pay for any more medical errors. According to the New York Times: "In a significant policy change, Bush administration officials say that Medicare will no longer pay the extra costs of treating preventable errors, injuries and infections that occur in hospitals, a move they say could save lives and millions of dollars."
This is likely to be highly controversial, given the rising rate of complications due to older patients being increasingly ill by the time they reach a hospital, thus being more prone to complications that Medicare and private insurers may deem to be "preventable."
According to the New York Times: "Among the conditions that will be affected are bedsores, or pressure ulcers; injuries caused by falls; and infections resulting from the prolonged use of catheters in blood vessels or the bladder."
Iran has increased attacks on Kurdish villages. According to the U.K.'s Guardian, Iran's Revolutionary Guards have increased shelling operations against villages in northeastern Iraq.
| |
| After The Rate Cut The Real Work Begins | |
 | | Subprime: The Big Five Questions |  | |
| The financial markets breathed a sign of relief on Friday, and the rally continued overnight. But history shows that times are far from certain.
So in order to get our bearings, we've asked five questions with the goal of keeping us on the right side of the trade.
What Happened Last week?
Two key events grabbed the spotlight, aside from the market's volatility. One was the announcement of Country Wide Financial's drawing of its entire $11 billion plus credit line in order to keep the business afloat. And the other, of course was the Federal Reserve lowering of the discount rate, an event full of drama since it marked a significant reversal of the Fed's viewpoint toward the current situation.
More important still was the controversy surrounding St. Louis Fed bank President Poole, who one day prior to the Fed's Discount Rate cut, had told Bloomberg in an interview, that the Fed would only lower rates in the presence of a "calamity."
The comments were politely brushed aside by a Federal Reserve spokesperson who noted that Poole was expressing his own opinion, not that of the central bank.
What Did The Federal Reserve Really Do On Friday?
This is the billion dollar question, as the answer opens the way for what might be the next set of developments.
The Fed lowered the Discount Rate, the rate that it charges banks at the Discount window, an interest rate traditionally reserved for banks that could not get credit from any other source.
Yet, the Fed made it clear that it no longer viewed the Discount window as a lender of last resort.
According to the Wall Street Journal, in a team penned article, including its inside the Fed hound Greg Ip, the Fed had been looking for a way to make a dramatic move, finally choosing to lower the Discount Rate.
The key points in the article are summarized in the following: "Eventually, Fed officials agreed to reduce the rate charged on loans from the discount window (to 5.75% from 6.25%) and try to reduce the usual stigma associated with such loans. By making these direct loans to banks more attractive, the Fed hoped to reassure banks that they could borrow if they needed to -- without the usual penalty to their bottom line or to their reputation -- and thus make them a bit more willing to lend in normal fashion. In addition, in its public statement Friday morning, the Fed made what amounts to a vow to cut its target on the federal-funds interest rate if normalcy fails to return. That is the key rate that the Fed normally lowers when it wants to loosen monetary policy. The Fed believed this combination of moves would assure everyone that it was aware of risks to the U.S. economy posed by the market turmoil."
Then, in a conference call that included representatives of both investment banks and deposit banks, Timothy Geithner, president of the New York Federal Reserve Bank, 'told banks about the discount-rate cut and said they could wait up to 30 days, instead of just a day, to pay back their discount-window loans. "We will consider appropriate use of the discount window...a sign of strength," said Mr. Geithner, according to a participant."
Finally, the Fed told the bankers that it would accept subprime mortgages as collateral for loans from the Discount window, making it reasonable for banks to lend strapped mortgage companies funds to sort out their affairs over the next few weeks.
What Did The Fed Hope To Accomplish?
By lowering the Discount Rate, and not the Federal Funds rate, the Federal Reserve accomplished two things. First, it got its drama. And second, it still left itself two big weapons to use in case of further trouble, the Fed Funds rate, and the bank reserve requirements lever.
The initial response was quite favorable. At least the downslide in global markets was at the very least slowed, which buys both the banking system and the global central banks time to see what happens next.
Meanwhile, the situation in the subprime market remains uncertain, as news of Countrywide Mortgage laying off employees hit the wires within the last 24 hours.
Where Does That Leave The Markets?
The markets clearly got a reprieve, and the rally that we've seen is at least partially due to short covering, as the volume on Friday was less that the volume we saw during Thursday's panic selling.
The big question of course is whether this is all over. And no one knows for sure.
The market should be prepared for more trouble as a whole new round of adjustable rate mortgages is expected to hit in September, once again raising the potential for loan defaults, and perhaps creating a whole new round of liquidity problems.
Conclusion
The biggest question is how we make money from what's going on around us?
First, we need to remain very patient. Anyone who was around after the crash of 1987 will remind us all of the volatility that followed that market decline.
We were there. In fact, we started investing a few weeks after the crash and remember the gut wrenching turns that market took for months before things settled into a more normal pattern.
Anyone who can remember back to 1999 will also attest to the fact that this could take some time to figure out.
The best thing to do right now is to take the market one day at a time, and to see what develops.
Otherwise, all we can do is hope that the worst is over. | |
| |
 | Oil And Commodity Summary: | | Supply Crunch And Hurricane Season
Crude oil, natural gas and gasoline prices slipped in overnight trading as the latest computer models suggest that hurricane Dean will not hit the Gulf of Mexico's oil and natural gas producing region.
According to Accuweather.com "The U.S. Minerals Management Service (MMS) announced Saturday it has activated its Continuity of Operations Plan team to monitor the activities of offshore oil and gas operations in the Gulf of Mexico. Twenty-seven percent of U.S. oil production and 15 percent of gas output comes from the Gulf, according to U.S. Energy Department figures."
We are still long the U.S. Natural Gas Fund (AMEX: UNG), but are otherwise mostly out of the energy sector for now. Dr. Duarte has an open position in the fund.
Crude has remained above $70 while natural gas was trading above $6.50 in overnight trading.
Natural gas is likely to see more volatility as hurricane season kicks into what is traditionally its most intense season.
Chart Courtesy of StockCharts.com
The Wilderhill Clean Energy Index may be headed for a re-test of the 200 area, but remains above its 200 day moving average.
Chart Courtesy of StockCharts.com
Crude oil prices remain range bound between $70 and $80.
Chart Courtesy of StockCharts.com
The Philadelphia Oil Service Index (OSX) has remained above its 200 day moving average and has resistance at its 50 day moving average near 265.
Chart Courtesy of StockCharts.com
The Amex Oil Index (XOI) survived a test of its 200 day moving average and has resistance near 1400.
Is A Big Move Coming In Natural Gas? Check out Chapter 13 in Dr. Duarte's latest book "Futures And Options For Dummies" (John Wiley & Sons)
- an excellent roadmap to the futures and options markets, and today's volatility. Order your copy today.
Disclosure: Dr. Duarte has open positions in oil and natural gas stocks and exchange traded mutual funds.
| | | | |
| Technical Summary: | | Indexes Hold Above Long Term Support
The Dow Jones Industrial Average and the Nasdaq Composite managed to hold above their 200 day moving averages last week, while the S & P 500 ended the week below the key dividing line between bull and bear markets.
The NYSE advance decline line and the number of stocks making new lows showed some improvement, and are clearly washed out.
That means that the market is oversold, and trying to recover, and that investors should remain cautious, while looking for opportunities.
When the Federal Reserve lowers interest rates, it is a signal, that the stock market will eventually right itself. The problem is that it is never certain how long it will be before things improve.
The bear market of 1999-2003 is perfect proof of how long it can take for a market to rally as the Federal Reserve lowers interest rates.
Much depends on what happens in the economy as well, and whether the subprime issues start to spread to the rest of the global economy.
We probably won't know that for a couple of weeks as the new economic data starts to emerge, with the empolyment report due out September 7.
One way to avoid major risk is to use our seasonality model, a mechanical model, which trades on the statistical chances of the market rallying at certain times during the year.
Institutions, such as mutual funds and pension plans, tend to put new money into the market at the start of a new month.
Our long term forecast, over the next 12 months remains upbeat, unless the major indexes fall convincingly below their 200 day moving averages.
What To Do Now
Watch what happens. Be selective. And remain patient and cautious.
We have some open long and short positions throughout our multiple portfolios. Yet, anyone who follows our strategies closely has seen their cash level rise significantly over the last few weeks.
And that's exactly the way our strategies are designed, to increase safety during volatile times in the market.
At some point, we'll be putting that cash to work.
Don't be in a hurry. Build a shopping list of stocks and be ready to use it when the situation is right.
5% in money market funds and T-bills, is better than being down 10% for the year by taking unnecessary risks.
Visit all our individual sections, both our ETF and individual stock picks daily for new ideas, and changes to open positions.
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
| | | | |
| Sentiment Summary: | | Sentiment Still Raises Questions
Fear gauges reamined higher than would be expected on 8-17, as the market rallied. This might be a positive. But it's too early to get terribly excited just yet.
The CBOE Put/Call ratio closed at 1.23. 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 1.89. 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 29.99 and 27.04. 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 sellers in the wee of 8-3-07. Again, this may or may not be significant.
What matters most is that this group of investors began selling aggressively since Memorial Day, and only slowed the selling in late July. 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 52% on August 17, falling, but 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.
| | | | |
| Market Moves | |
IBM Holds Up During Selling Spree
IBM (NYSE: IBM) has weathered the recent storm on Wall Street as Microsoft (Nasdaq: MSFT) has felt the pinch.
Chart Courtesy of StockCharts.com
Both IBM and Microsoft are Dow components, and neither stock has been considered a growth stock for a long time now.
Still, both remain institutional favorites and are big pockets of cash, with Microsoft holding $6.1 billion in cash as of the end of June and IBM holding over $7 billion at the same time.
Both companies are now dependent on acquisitions for much of their future growth and significant amounts of their development.
And both are trying to increase their revenues from consulting other recurrent revenue schemes.
Of the two, though, IBM has held up better over the last few weeks, as the market has fallen.
That means that the big money may not be expecting any major issues with IBM in the near future. That means that IBM's relative strength is something to keep a very close eye on these days. | | | | |
|
© Copyright 1996-2007, Kollar Market Analytics, Inc., All Rights Reserved.
- Market IQ reports may not be redistributed without permission.
- Disclaimer: The financial markets are risky. Investing is risky. Past performance does not guarantee future performance. The foregoing has been prepared solely for informational purposes and is not a solicitation, or an offer to buy or sell any security. Opinions are based on historical research and data believed reliable, but there is no guarantee that future results will be profitable.
| |
