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 | Dallas, TX
November 12, 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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Chavez: Reality Check. Oil & Commodities: $100 Remains Tough Ceiling. Stocks: Too Much Uncertainty
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 | What's Hot Today: | |
Stock index futures reversed their positive stance early this morning on news that Wachovia is expecting increased loan losses this quarter.
Today's Economic Calendar: No economic data scheduled for release. Sources: The Wall Street Journal and Marketwatch.com.
News For Thought
A Harvard study done by by the Shorenstein Center on the Press, Politics and Public Policy at Harvard’s John F. Kennedy School of Government found that the media does indeed have a liberal bias.
According to Investor's Business Daily the study "examined 1,742 presidential campaign stories appearing from January through May in 48 print, online, network TV, cable and radio news outlets. Among many findings, it determined that Democrats got more coverage than Republicans (49% of the stories vs. 31%). It also found the “tone” of the coverage was more positive for Democrats (35% to 26% for Republicans)."
The paper added: " For “top-tier” candidates, the difference was even more apparent: Barack Obama’s coverage was 70% positive and 9% negative, and Hillary Clinton’s was 61% positive and 13% negative. By contrast, 40% of the stories on Republican candidates were negative and 26% positive. On TV, evening network newscasts gave 49% of their campaign coverage to the Democrats and 28% to Republicans. As for tone, 39.5% of the Democratic coverage was positive vs. 17.1%, while 18.6% of the Republican coverage was positive and 37.2% negative. "
They report. We decide.
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| Chavez: Reality Check | |
 | | Tough Weekend For "El Presidente" |  | |
| Venezuela's president Hugo Chavez had a tough weekend. Not only did the king of Spain tell him to "shut up" at an international summit, but the press with regards to Chavez' Bolivarian revolution turned decidedly negative.
The headline grabber was the "shut up" earned by Chavez when he called former Spanish prime minister Jose Maria Aznar a "fascist" in a Latin American summit in Santiago, Chile. But, the tone of the reporting on Chavez has gone from amusing, and overall positive, to stark and nearly negative, given the media's attraction for the left. (Editor's note: see News For Thought, above).
According to Reuters, Venezuelans are scrambling for food now, and According to the Los Angeles Times, Chavez' policies have turned Venezuela into an attractive country if you want to run a crime syndicate.
The Haves And The Have Nots
Venezuela is approaching a difficult turning point as food shortages and long lines are becoming part of the landscape, raising visions of present day Cuba, and the Soviet Union in the days before the crash of the Berlin Wall.
Meanwhile events are unfolding that suggest that the current developments may be a forecast of what lies ahead, as ideology meets reality.
Reuters reported: "Venezuelan construction worker Gustavo Arteaga has no trouble finding jobs in this OPEC nation's booming economy, but on a recent Monday morning he skipped work as part of a more complicated search -- for milk."
According to the article "Venezuelan consumers are increasingly facing periodic shortages of basic food products as the economy shows signs of overheating amid record revenues from an oil boom. The shortages have increased skepticism of Chavez's economic policies and provided a political backdrop to campaigning this month for a referendum on a new constitution that he says is needed to make Venezuela a socialist state."
Central to the food shortages are Chavez' price controls. Reuters reported that these have made prices so low that businesses are starting to sell at a loss and thus have no incentive to fill their shelves.
Much of the problem stems from Chavez nationalizing key areas of the Venezuelan economy and enforcing price controls that were put in place in 2003 but had been "largely ignored" by businesses.
A typical example of the laws was the enforcement of an "anti hoarding" law that saw a 125 ton seizure of powdered milk from Nestle.
More interesting is the fact that black markets for food are springing up. According to Reuters: "A black market has sprung up where informal vendors illegally peddle bags of sugar, beans and precious powdered milk -- for as much as double the regulated price. The state's consumer protection agency, backed by military reserves, often shutters supermarkets for selling above the fixed price, but vendors offer their goods from makeshift stands in downtown Caracas in plain view of authorities."
In fact, other signs of disorder are apparent. Over the last week the violence has escalated as student protests have brought reprisals from masked armed gunmen who remain unidentified. The gunmen reportedly attacked a group of students at the Central University in Caracas injuring nine and killing two. The students had just returned from an anti-Chavez demonstration.
Criminal Paradise
Food shortages and black markets are the least of Venezuela's problems, as crime and violence are on the rise in the country.
According to the Los Angeles Times "Venezuela has become a major hub for international crime syndicates. What attracts them is not the local market; what they really love are the excellent conditions Venezuela offers to anyone in charge of managing a global criminal network."
The Times cites Venezuela's location, as well as its upscale communication and international transportation infrastructure as part of the attraction. But most of all, it's the corruption that makes it most attractive as "Transparency International ranked Venezuela a shameful 162 out of 179 counties on its corruption perception index."
According to the Times "Anti-trafficking officials in Europe, the United States, Asia and other Latin American countries are paying unprecedented attention to Venezuela. These officials are not particularly interested in Venezuelan politics or in Chavez's policies. All they care about is that the tentacles of these global criminal networks are spreading from Venezuela into their countries with enormous power and at great speed."
A startling set of statistics is starting to emerge as "About 75 tons of cocaine left Venezuela in 2003; it is estimated that 276 tons will leave the country this year. Before, the main destination was the United States; now, Europe is increasingly the target. Italy and Spain are two new important and lucrative end-user markets, and earning in euros is undeniably better than getting paid in dollars these days."
The Times reported that European and international law enforcement authorities are now spending more time in Caracas than Bogota, Colombia, apparently the former world capital of drug trafficking as "the heads of many of the major criminal cartels now operate with impunity, and effectiveness, from Venezuela. The cartel bosses aren't exclusively Colombians -- there are Asians (especially Chinese) and Europeans too. Caracas' most posh neighborhoods are home to important kingpins from around the world, including some from Belarus, a country that Chavez notably has visited several times."
And the list of interesting incidents is growing. According to the Times "Money moves in and out, and not just through electronic inter-bank transfers. The combination of private jets, suitcases full of cash and diplomatic immunity has opened up new possibilities. Recently, one Venezuelan member of the boliburguesía -- the new mega-rich -- was caught carrying at least one suitcase full of money. He was discovered by a customs officer in Buenos Aires but not arrested. Turns out he was traveling on an executive jet with senior members of the government of Argentina's president, Nestor Kirchner."
According to the Times, diamond and weapons smuggling is also flourishing. Here is an example: "In Uruguay, an outraged legislator dropped this bombshell a few weeks ago: A group of Venezuelans had engineered the sale of Iranian arms and munitions to his country, using Venezuelan companies as a cover to bypass the U.N. embargo on Iran's arms trade. Likewise, the guerrillas in Colombia seem to have no trouble acquiring weapons -- many of which come through Venezuela-based arms dealers."
And making matters even worse "human traffickers have made their way to Venezuela as well. The country has become a haven for human traffickers because its laws offer so little protection to their victims, especially women. It is also a major stopover for illegal immigrants from China, the Middle East and other parts of Latin America who are on their way elsewhere. They can obtain a Venezuelan passport in a matter of hours."
Conclusion
Chavez seems to have tinkered with the normal flow of business in the Universe, Chaos, with the predictable outcome becoming apparent, as Venezuela flirts with Disorder.
Price controls usually lead to apathy from businesses and illegal trafficking. Already the black markets have sprung up.
Food shortages in the poor neighborhoods while the very rich carry money in suitcases sounds like a recipe for trouble, somewhere down the road. But not likely for Chavez, whose military and security forces are in control.
Venezuela is an increasingly dangerous place, for its citizens, and for the rest of the world, as its economy seems to have diversified beyond the export of oil, to the export of other things that are in many ways darker than the tarry oil from the Orinoco River Basin.
And the rise of a criminal class to prominence is a prelude of dark times ahead, as eventually the territory wars and the inter-gang rivalries will flourish, making the streets killing fields.
For the United States, and now increasingly Europe, the reality of the "Bolivarian Revolution" in becoming starkly clear. Venezuela is a hub for dark commerce and dark ideologies.
It seems as if the king of Spain might have said what others were thinking. | |
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 | Oil And Commodity Summary: | | $100 Remains A Tough Ceiling
Gold and oil were selling off as we went to press, as China's central bank raised bank reserve requirements for the ninth time this year.
Meanwhile, China's trade surplus grew above 20%, but came in below what the majority expected, 30%.
With reports of violence at gasoline lines in China, and the government intervening, OPEC migh start to increase its output further, in hopes of cooling the markets.
Yet, what the future holds remains unpredictable, which is why volatility is likely to increase in the next few days.
Cold weather has yet to become a factor, but could become significant at any time, although not necessarily this week.
So far the bull run for oil is on as long as $90-$95 remains support.
Energy stocks have been volatile, making matters a bit more confusing.
Supplies of crude oil fell last week but less than expected, while distillate supplies rose slightly. Distillate includes the seasonally important heating oil.
Natural gas has remained flat mostly due to the large buildup of supplies from a mild summer and a mild winter, while producers continued to extract at full tilt over the last few months.
Still, the global geopolitical situation remains too unstable, and anytime you have stock market volatility, big funds tend to sell whatever is liquid in order to raise money for margin calls.
Crude oil supplies have been tightening of late, but last Thursday's natural gas supply data showed another increase in supplies for that fuel, which is showing above average stockpiles on a five year average basis.
Our energy sector has been updated to match the current transitional stage of the market.
The oil (XOI) and oil service (OSX) indexes made marginal new highs on 11-6, but pulled back on 11-7.
Thus we continue to own oil and trade natural gas, concentrating on the commodities, through our ETF timing models using the U.S. Natural Gas Fund (YNG) and the U.S. Oil Fund (USO). Dr. Duarte owns shares in UNG.
If you own oil and gas related stocks that are acting well, there is no reason to sell them at this point, unless your sell stops get hit.
The bottom line is that our goal is to protect our profits. If the stops get hit, we'll wait and see what happens before jumping back in aggressively.
Chart Courtesy of StockCharts.com
The Wilderhill Clean Energy Index is still indecisive with 250 now being support.
Chart Courtesy of StockCharts.com
Crude oil prices are testing the $95 price area, which now becomes key support. $95-$100 is now key resistance.
Chart Courtesy of StockCharts.com
The Philadelphia Oil Service Index (OSX) closed above 300 on 11-6 but has since rolled over.
Chart Courtesy of StockCharts.com
The Amex Oil Index (XOI) is also having a hard time.
Disclosure: Dr. Duarte may have open positions in oil and natural gas stocks and exchange traded mutual funds.
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| Technical Summary: | | Inflection Point
The S & P 500 closed last week below its 200-day moving average, with the index now spending three days below the key support level.
At the same time crude oil is struggling, the Euro and the British Pound look over extended, as the dollar is very oversold, and gold is starting to pull back.
In other words, the markets are starting to test the veracity of staying on the course over which they have been traveling for the past few months, and the potential for a reversal in serveral markets nearly simultaneously is rising.
To be sure, anything is possible, so there is no need to rush out and sell profitable positions, yet. But it is a good time to be aware of the potential for a significant intermarket trend change, and its consequences.
The technical aspects of the stock market have been sending out warnings over the last few days, with market breadth, and momentum, as measured respectively by the NYSE advance decline line and the number of stocks making 52-week highs showing significant weakness which proved to be good warning signs for the 360 point drop on 11-7.
Indeed, the problems with the current market started on October 19, and may have worsened as traders fear that the Fed might be done lowering interest rates, something that some central bank FOMC members are noting in their current speeches.
The bottom line is that investors are uncertain about the future. And uncertainty, breeds volatility, which leads to selling as the market whipsaws investors.
It's still too difficult to know where this is going, since we are nearing the most lucrative time of the year for the stock market, the Santa Claus rally season.
Still, uncertainty is not good for investors, and are too many fires blazing, with the potential for more surprises lurking. In other words, this is a good time to monitor current positions, and to wait for more sedate times before taking any kind of sizable risks.
History shows that the Federal Reserve usually starts an easing cycle in the third year of the Presidential Cycle. And this year has again proven that to be a significant pattern.
If history holds up, we can expect to see several more rate cuts extending into next year, although the Fed may not ease any more for 2007.
At some point, though, the election becomes a factor. And the Fed does not want to be seen as becoming a factor for the party that's in power. That means that any rate cuts for next year would likely come in the early to middle months, barring of course a very weak economy that requires multiple back to back cuts.
Current Dynamics: Correction Fully In Place
The market is now in correction mode. If you have followed our advice you are now holding a lot of cash. You made some good profits, and any losses were small and well managed.
Now we wait and see what happens.
Momentum has been arrested since October 19, neutralizing the bullish developments that had preceded the market's current weakness.
As of 9-21, we had had three days in which the ratio of up volume to down volume on the NYSE has exploded beyond 9 to 1, the traditional momentum thrust described by market guru Martin Zweig. The first thrust was delivered on 8-29, where the ratio of up volume to down volume on the NYSE was 10 to 1. It was followed by the 23 to 1 ratio of up volume to down volume on 8-31.
And on 9-18, the market delivered another blast of momentum with the ratio being well over 20 to 1. Combined with two discount rate cuts, and one Fed Funds rate cut, that means that the market has now had three significant interest rate cuts in the last 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
Cash is a good place to be if you're a stock trader. It's also important to monitor our gold, dollar, and treasury bond positions very carefully.
If you get stopped out, don't be impatient to get back in. Pay close attention to news and the market's reaction.
Let your cash levels build up in your stock portfolio by letting the market stop you out. Stay put, and manage any open positions that you have carefully. If you get stopped out, there is no reason to add another new position.
Remain cautious and patient. Volatile markets are best left alone until they sort themselves out. Focus on your open positions.
Use the seasonality strategy to bolster returns and reduce risk in the S & P 500.
Take care of your portfolio by monitoring the positions frequently and don't hesitate to take at least partial profits where you have them.
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: | | No Fear Climax Apparent
The market continues to stumble but the fear gauges have not reached panic levels. That means that the current decline could last longer than expected.
The CBOE Put/Call ratio closed at 1.08. 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 1.53. 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 26.16 and 29.61. 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 moderate buyers of stock on the week of 10-26-07. This reversed the prior week's heavy selling. Still it wasn't enough buying to get us bullish, and it came in the midst of a tough period for the market, suggesting that it was short covering. This indicator remains bearish.
Market Vane's Bullish Consensus was at 63% on November 9. This indicator has not reached oversold levels, having remained above the 40% that often marks meaningful market bottoms. The UBS sentiment index rose to 70 in October, but is still well below the reading of 87 in July. This is constructive for the long term health of the market.
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| Market Moves | | Goldman Sachs And Google Test Long Term Support
Goldman Sachs (NYSE: GS) and Google (Nasdaq: GOOG) have been suffering along with the market of late.
Chart Courtesy of StockCharts.com
Goldman and Google, the two biggest G's of the stock market have not escaped the selling spree on Wall Street.
Goldman has taken a bigger psychological hit moving back to a test of its 200-day moving average, but Google has more trouble ahead if the market does not improve.
Both stocks have been market leaders for several months, and their performance is important to watch in order to predict what could be ahead for the rest of the markets.
Aggressive selling in Goldman may be a forecast of more trouble in the financial sector, while the same can be said for Google with regard to the technology sector.
Still, more than anything else, selling in these stocks could also be taken as a sign that investors are willing to sell anything that is liquid. And that means that the overall market might have more trouble ahead.
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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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