BISHOP’S  MARKET  OUTLOOK, 02-18-03

FINANCIAL EDITION

ENERGY:  We note that on the longer-term charts, all Energy contracts are nearing their 2000 continuous highs after making head & shoulders bottoms in the Oct-Nov 2001 timeframe.  This “symmetry on the charts” is a classic technical topping (or at least re-tracing) zone.  Further, these contracts show massive levels of long-side speculation, particularly gasoline.  Position longs should keep the tightest of trailing and profit stops at this point.  Reversals to the downside, which would ordinarily be very attractive shorts should be approached with caution, however.  Energy is currently the prime beneficiary of the confusion surrounding the Iraq crisis.  In this environment, un-hedged short positions carry unacceptable levels of risk.

CL: Crude looks very toppy in the short run. Position longs should keep the tightest of stops along the upsloping support trendline from the Feb. 3 swing low.  If hit, move to sidelines.  Ordinarily, we’d be looking for stop and reverse to short but given the factors affecting this market we prefer either an exit or a hedged short position only if stops are hit. Longer-term, the strength of the last upleg from the Nov. 02 lows is a technical indication that after any pullback here we’re likely to see a re-test of these highs.  This observation is tempered somewhat as the last uplegs in distillates (HO & HU) were not as strong, adding support to the thesis that the oil rally is more Iraq-driven trading hysteria than economic reality.

HO: Position longs have final trailing stops placed along the upsloping parabolic support trendline that includes the Feb. 12 blip low.  All other energy comments apply.

HU: After the long rally from the Nov. ’01 lows, HU appears very near a massive speculative top.  Our best guess is gasoline will retrace from it’s Feb 12 (basis Apr) blip top.  Position longs should keep the tightest stops.  CL comments apply.  Any short positions placed while the Iraqi confusion persists should be hedged.  Of all energy contracts, gasoline would be our preference for a hedged short.

NG: A very similar situation to CL.  The rally is even more speculative.  Position longs keep the tightest of stops as we expect the most significant selloff since May-Aug of ’02.  Thereafter, a re-test of current highs is still technically plausible.

ENERGY STOCKS: The selloffs in both XOI and OSX from late 2002 further illustrate the speculative nature of the current Energy bubble.  This is a market driven by understandable Iraq-oriented concerns that will only “return to rationality” when that issue is resolved, one way or the other.

METALS:  During the Florida seminar series we highlighted the metals as part of an “Intermarket Bubble” involving unsustainable speculative rallies in gold, currency, bonds, & energy. 

GC: Gold was highlighted during the Florida seminar series from Jan 27-30^th as an integral part of the Intermarket Bubble.  3 trading days later, April GC peaked at 384.50 on Feb 5 with a classic reversal bar.  Now at 352.20 we believe there’s further downside, targeting 325-335 by mid to late March.  Speculation remains very high, bearish seasonality (Apr / May) is ahead and volatility has not yet subsided.  However longer-term, as with energy, the strength of the GC move from the Oct/Nov consolidation to the Feb high indicates that after the current selloff, an eventual re-test of the highs remains probable at this point.  One primary reason: the global debasement of currencies.  All major economies are now pursuing aggressive fiscal stimulus on top of accommodative monetary policies. This translates to more currency in circulation, inflation fears, etc.  Longer-term the industrialized world faces baby-boom retirement obligations that are likely to be met, in part, by simply printing checks.  Time will tell.

SI:  Plunging after topping out on Feb 5 @ 495 (basis Mar), bearish Jun / Jul lies ahead.  Now at 453.50, after any brief rally here we look to break 450, targeting 4.25 or lower.

HG: A bullseye call from the 12-09 Outlook: “…our SD Index is becoming VERY TOPPY …..Now at 74.90 (Mar), Copper looks ready for at least a blip pullback to the 72-73 area before a likely speculative rally to test the June continuous highs (79.50) in seasonally strong Jan/Feb….”  The copper pullback exceeded our expectations, closing at 70.20 on Dec. 31 and then rallying smartly to test the June highs, topping out at 79.55 on Feb 3^rd in the middle of peak seasonality.  Now bearish May/June lies ahead.  Note the extreme bullish speculation and complacent low volatility at the Feb. high.  Now at 75.55 we expect further downside, targeting the 65-70 area in this range-bound market.

PA: Now at 254 basis March, Palladium appears to be in the final stages of putting in a bottom on the long slide from the Jan. 01 highs.  However, a retest of recent lows in late ’02 appears technically necessary in order to complete that bottoming process.  Currently targeting the 200 – 210 zone by late March.  If this develops, it would likely be accompanied by a correction in Platinum and on-going softness in GC.

PL: Platinum continues to defy the fundamentals.  Position longs should have the tightest of stops along the parabolic upsloping support trendline which includes the Feb 10 pivot low.  Now at 675 (basis Apr) we look for a counter-trend pullback to at least the low 600’s.  As with GC, the power of the last upleg from the Oct-Dec congestion leaves us thinking that ultimately a re-test of the Feb 4 high is technically not out of the question.

BONDS/ NOTES:   A bullseye call from our 12-09 Outlook:  “….TY is a mixed picture.  We narrowly favor short term upside and the risk-reward of the long side is attractive with logical stops at the 12-03 or 12-05 low (110-260 March). Targets are to take out the 10-10 high (115-090) by yearend.  Such a move would likely coincide with: 1) Softness in U.S. stock indices at least early in the move  2) a final downside plunge in the Nikkei  3) a final U.S. dollar selloff… all of which we expect for independent reasons….” Indeed, our stops at the 12-03 and 12-05 lows held, and TY hit 115-17 on Dec. 31!  Also as predicted, since our 12-09 Outlook the U.S. stock markets and the Nikkei have plunged and the dollar has tanked, setting up the “Inter-Market Bubble” of toppy bonds, currencies, and gold.  TY is now a very mixed picture.  What we are MOST SURE of is that position longs should keep the tightest of stops here, 113-29 basis March, 112-15 or so basis June.  Technically we’re still looking for the longer maturities to follow the short end and re-test of October’s low in yield (3.61% on the 10 year) by mid-March which of course would translate to new note & bond highs. How could this happen if the U.S. stock market is rallying?  Bonds could continue to make marginal new highs in the face of rallying U.S. stocks if the DOLLAR is also rallying, which we believe will be the case.  Note that we are less sure of a U.S. stock rally over this timeperiod.  Also supportive for short-term bond & note upside: mutual fund inflows over the past 2 weeks, which certainly include some U.S. dollar repatriation, have heavily favored bonds and munis over stocks and the money market.  Bulls should be extremely cautious here regarding the extreme long-side speculation in Notes.

STOCKS: On-going bullseye calls in December and January.  From the 12-09 Outlook: “….  We note that the Nikkei appears to be heading for a fresh low in the days ahead.  During the same timeframe we would expect U.S. indexes to struggle, bonds to remain buoyant and the dollar under pressure…”  From the Jan. 4^th Cornerstone Seminar (S&P at 930, OTC at 1421): “…. We look for stock indices to trend downward, towards at least a mild re-test of the Oct. lows”.  The S&P and OTC subsequently collapsed to hit 817 and 1262 respectively on Feb. 13. Our list of Nasdaq short sales doubled the performance of the OTC over this period.

At this point the erratic stock index charts present mixed pictures.  Note the following factoids on the bullish side: 1) The Nikkei marginally put in a fresh new bottom in February but may need another re-test to complete a final bottoming pattern 2) The dollar rally and gold selloff are both bullish for stocks.  On the bearish side: 1) Stock mutual fund flows remain bone dry  2) Technically, interest rates look poised for a re-test of their Oct lows  3) Technically the selloff from the 12-02 index highs looks incomplete and the rally unfolding from the Feb 13 pivot lows looks more like a “countertrend rally” at this point. Our conclusion:   Any position longs should have the tightest of stops as this rally can only be seen as countertrend.  We still narrowly favor the view that after a blip rally here,  the Oct. lows will be re-tested in the weeks ahead.

FOREX:  Currencies figured prominently in our presentations at the Florida seminars from Jan. 27 to 30^th.   We cited the rallying Euro, Pound, Swiss & Yen as components of a larger “Intermarket Bubble”.  The Pound now appears to have topped out the week of our Seminars on Jan. 31^st.  The Euro and Swiss were not far behind, topping out 3 trading days later with classic reversal bars on Feb. 5^th.  The currency outlook at this point is cloudy.  What we’re most certain of is that the selloffs are likely not over.  These currencies have enjoyed a 12 month rally from their Jan/Feb ’02 lows and are likely to retrace 7 to 10 percent if February is not the ultimate high.  Look for Gold to remain weak during this projected selloff.  The dollar rally in turn is likely to support BOTH U.S. stocks and bonds up to a point at which bonds & stocks will de-couple.  The direction of the de-coupling will give us clues as to the future of the currencies.  Should stocks continue to rally, this is almost certainly bullish for the dollar.  A scenario where bonds rally and stocks retrace is less clear as to it’s currency implications.