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 | Dallas, TX
September 4, 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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The Bullish Case For Stocks. Oil & Commodities: What's After Felix? Stocks: Cautiously Bullish
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 | What's Hot Today: | |
Wall Street's trader population will trickle back into the office this week, just in time for lots of data, punctuated by the employment report on Friday.
Today's Economic Calendar: 10:00a.m. July Construction Spending. Previous: -0.3%. 10:00a.m. August ISM Manufacturing Business Index. Previous: 53.8. 5:00p.m. ABC/Wash Post Consumer Conf. Previous: -19. The Wall Street Journal and Marketwatch.com.
News For Thought
President Bush's Iraq trip was a surprise, but revealed a good deal of what may lie ahead for the war. Among the highlights were the hints about troop reductions, as well as the deliberate slap at Baghdad's central government, since the president's stop was in Anbar, a Sunni dominated area.
The White House has shifted gears in its strategy, dealing more frequently with local governments, and dolling out money on a shiek by shiek fashion, in exchange for having the communities police themselves, and turn on Al-Qaeda and other radical elements.
The strategy seems to be working in some areas of Iraq, suggesting that as more time passes, it will be expanded.
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| The Bullish Case For Stocks | |
 | | Thoughts To Ponder |  | |
| Bull markets are spawned when three things happen, sentiment becomes so negative that it seems as if the world is about to end, the Federal Reserve begins to ease interest rates, and the market delivers a momentum thrust.
Over the last three weeks, these three events have been delivered, setting the stage in our opinion, for a new and perhaps a significant rally in stocks.
First, though, we have to issue a disclaimer, since it is a different world than it was even a decade ago, due to China's presence as a major financial force, and because Congress is back in session.
Now, that we're through with the inevitable disclaimer, let's look at the situation.
The subprime mortgage disaster led to a full blown liquidity crisis, that brought the world's central bankers out of their recent slumber and delivered a fair amount of money into the banking system.
Prior to the infusion of cash, though, the markets fell like stones, and sentiment got to levels of bearishness not seen since 9/11 in some cases.
Finally, things became so dangerous, that the Federal Reserve lowered the Discount rate, and Mr. Bernanke, just last Friday in his speech in Jackson Hole, Wyoming, made it clear that the Federal Reserve would do whatever it took to keep the financial markets and the economy on the right path, while not "bailing out" investors that had made bad decisions.
As Bernanke's remarks were filtered through the market, stocks rallied, and by the end of the day, the ratio of up volume to down volume on the NYSE was 10 to 1.
what makes this significant is that on 8-29, just two days prior, the ratio of up volume to down volume was 23 to 1, making it two days within close proximity of the stock market delivering what is known as a volume thrust, as described by Martin Zweig.
So now, we've had the scenario that usually mark the start of a new bull market, the crisis, the rise in pessimism, the lowering of interest rates, and the momentum thrust.
What makes the scenario even better is that few have noticed it, and that there is a lot of disbelief still out there.
Yet, as we noticed above, there is always the potential that things might not work out as they have in the past, due to the specific changes in the global economy over the last several years, and the still unknown effects of those shifts.
Conclusion
The components of a new bull market seem to be in place, but enough uncertainty is also present to warrant some caution in wading fully back into the water.
Still, the opportunities to make significant amounts of money are often marked by the grimmest of circumstances.
Savvy investors will at least entertain the possibility that a new bull might have been launched.
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 | Oil And Commodity Summary: | | | | | | |
| Technical Summary: | | Momentum Evident
Stocks delivered a second momentum thrust on 8-31, as the ratio of up volume to down volume on the NYSE was 10 to 1. This comes on the heels of the 23 to 1 ratio of up volume to down volume on 8-29, and qualifies as a double barrel buy signal.
Combined with a Discount rate cut, this has the potential to feed a significant rally in the stock market, if history holds up.
That means that the burden of proof is now on the bulls, and that the real tug of war has now begun, with the market likely to focus on the employment report and the barrage of economic data out this week.
Today's most important piece of data is likely to be the ISM report, which chronicles the purchasing manager's report on a national level. A reading below 50 would show that the economy is contracting, and that the Federal Reserve would have to give higher consideration to lower the Fed Funds rate, to go along with its Discount rate cut.
What else would we like to see? From a technical standpoint, it would be great to see the NYSE deliver a 2-1 advance decline ratio over two weeks, further confirming the positive tone.
Already, we've seen some good things, as stocks delivered two momentum thrusts (8-29 and 8-31) as the ratio of up volume to down volume on the NYSE was over 20 to 1, and 10 to 1 respectively.
This is called a momentum thrust and was originally described by Martin Zweig. Two or more of these days within 90 days of each other usually lead to a significant rally.
Again, there is no guarantee that these indicators will be flawless. But the fact that they have come in the third year of a Presidential Election cycle, does add some credibility to their occurrence.
Also positive is the fact that the S&P 500 has climbed back above its 200-day moving average and that market breadth was quite excellent.
So, it's time to put just a bit more money to work, while remaining selective. See our individual sections for ideas, and look on a daily basis, as we are aggressively looking to add new picks.
Seasonality traders should have bought the S & P 500 Spyders (AMEX: SPY) at the open on 8-31 and sell at the close on 9-5.
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
Use the seasonality strategy to bolster returns and reduce risk. If we're wrong, the exposure to risk will be limited.
Otherwise, look to move back into the market, while remaining aware of the fact that we might be early, and that we could be wrong.
Take care of your portfolio by monitoring the positions frequently and don't hesitate to take at least partial profits where you have them.
Stay patient, and vigilant. At some point, we'll be putting more cash to work.
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
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| Sentiment Summary: | | Sentiment Remains Bullish
Put/call ratios remain bullish.
The CBOE Put/Call ratio closed at 1.06. 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 1.80. 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 23.38 and 24.53. 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 aggressive buyers on the week of 8-17-07. This buying coincided with the bottoming action in the markets and supports the notion that at least some kind of trading bottom is in.
This may be a bullish development, since 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 53% on August 31, stabilizing but remaining above the 40% that often marks meaningful market bottoms. The UBS sentiment index fell to 73 in August from 87 in July, showing a moderate decrease in bullish sentiment. This is a moderate positive.
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| Market Moves | | Intel Tests Top Of Trading Range
Intel (Nasdaq: INTC) is on the verge of a major break out.
Chart Courtesy of StockCharts.com
Intel has been quietly gathering some fans. The stock is up 45% since April, and is testing the top of its recent consolidation pattern near 26.
To be sure, there is little in the news for this rally, which makes it even better, as it shows that long term value players have been snapping up shares cheap.
That sets up the potential for the next, and more exciting up wave, as momentum players start to notice and jump on the wagon.
If that's what lies ahead for the stock, we'll know soon enough, as the volume picks up and the stock starts to move aggressively above 26.
The stock's five year high came in late 2004, near 33, giving this rally the potential to still deliver some excellent results. | | | | |
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- 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.
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