BISHOP’S  MARKET  OUTLOOK, 04-01-03

INTRO: In late Jan / early Feb we featured the developing “Intermarket Bubble” in the Florida seminar tour.  Financial markets were moving to extremes in lockstep: peaking Gold, Forex, Bonds, & Energy vs. bottoming interest rates and stocks.  Since that tour the Intermarket Bubble has unwound quite nicely.  Now, just when you think you’ve seen it all we are faced with markets understandably under pressure from War Jitters.   We have a fascinating situation where the “technicals” are now confirming the “emotionals”….while the Jitters have us on the sidelines in many markets, so do the technicals.

ENERGY:  Poster-children of the 1^st Quarter Intermarket Bubble, Energies are now generally mixed pictures we’re avoiding.

CL: While technically we read the upswing from the 3-21 low as a downtrend rally, the bulk of the selloff from the 3-10 high is likely in. Note the high level of hedging & the peaking implied volatility at the 3-21 low. While a mild re-test of the low is marginally probable, it doesn’t look like a great trade, especially with bullish April/May ahead.  On the upside the pattern is poorly defined. We prefer the sidelines.

HO: Appears somewhat more likely than CL to re-test it’s 3-25 low.  The blip of the past week is largely short-covering as open interest continues to decline.  We prefer the sidelines for the moment.

HU: Ditto to CL & HO

NG: Position shorts keep the tightest of stops (below 530 basis May) and if hit move to the sidelines.

ENERGY STOCKS: The XOI in particular has put in a very believable intermediate-term bottom as of 3-21-03 and may be seen as support for energy commodities.

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: Closing 3-31 at 335.90 (Apr), we look for a brief rally to the 340-345 area in the days ahead.  Thereafter a re-test of the 3-21 low (325.5) is likely.  Note the weak rally from the 3-21 wave 3 pivot is short-side profit taking as open interest is not increasing.  Also, Gold is weak vs. all major forex.  We look for a bottom in the selloff from the 2-05 high to occur in the April/ May bearish bottoming timeframe.

SI:  Position shorts should tighten stops as the majority of the move from the 2-05 high has likely been made While we expect a re-test of the 3-21 low (435 basis May) in the next 1-2 weeks, such a re-test is likely to be highly speculative.  Note also the very low option volatility setting up for a “price surprise”.  Be patient and look to hedge long futures with cheap puts if good long entries present themselves in the weeks ahead.

HG: Copper topped out on 2-26 at 80.30 (May), at the top of its sideways channel.  Note the very low implied volatility and high speculation on 2-26 in the peak Feb/ Mar season.  Now at 7145, after any blip rally here we expect lower lows in this market.

PA: A bullseye call from our Feb 18 Outlook: “…Now at 250 basis June… a retest of recent lows in late ’02 appears technically necessary ….  Currently targeting the 196 – 206 (June) zone by late March.  If this develops, it would likely be accompanied by a correction in Platinum and on-going softness in GC….”   So far Palladium has exceeded our expectations, closing yesterday at 182.45.  Shorts have the tightest of stops to lock in profits over this long decline.

PL: A mixed picture. We note the weakness in PL stocks that normally LEAD the metal (AAPTY, SWC, PAL, & LNMIY).

BONDS/ NOTES:   A bullseye call from our 2-18 Outlook:  “…  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. …  Also supportive for short-term bond & note upside: mutual fund inflows over the past 2 weeks…”  Indeed our tight stops held as bonds and notes continued to rally through March 10^th as the Intermarket Bubble unwound in earnest.  Now, the yield curve flattening & credit quality narrowing are symptomatic of a bottom in Treasury yields.  For the moment, we’re watching from the sidelines during the current blip rally from the 3-21 pivot lows.

TY: As part of the Intermarket Bubble we alerted readers to in late Jan / early Feb, the rising bond & note prices appear to have now put in a meaningful top as of the March 11^th highs (115.05 basis Jun).  Importantly, the 10-year yield has also technically bottomed as of 3-10 at 3.59%.  Also, the peak in the long / short yield curve ratio in mid-March also points to a bottom in yields.  Position traders should be on the sidelines at this point. Hedgers say the rally from the 3-21 pivot low may approach the 3-11 high. The rally at this point is only short-covering as open interest continues to shrink.

TU, FV:  These shorter-term notes also appear to have topped out on 3-11. TU has the more bearish hedging activity, consistent with a flattening Treasury yield curve.

CORPORATE:  The continuing decline in the Corporate / Treasury yield ratio and in lower grade / higher grade corporate credit spreads are signs that corporate bonds are back in favor after 3 years in the wilderness due to balance sheet concerns.  We expect the “scramble for yield” to persist due to the historically low yields in many issues.

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.

And from the 2-18 Outlook: “…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…”

Today, while stocks did indeed continue to selloff, beginning the following day, the major indices have not yet tested their October lows.  What is most certain to us in this most emotional of markets is that the next few days will be very telling as to an eventual test of March and October.  The indices simply must rally here as the selloff from the 3-21 & 3-24 highs will gain too much momentum & increase the likelihood of a rush to the bottom.

SP:  The chart is indecisive and the extraordinary Iraq conflict has us temporarily on the sidelines.  We note a host of positive factors: 1) Global indices generally at or near bottoms  2) Intermarket factors positive: toppy bonds – metals – energies and a bottoming dollar  3) Positive hedging  4) moderately rising equity mutual fund flows, although they are not yet net positive.   Negatives: 1) the erratic chart  2) today’s plunge in the Nikkei, looking like a re-test of historical lows.   Should this market rally we would expect the following groups to lead the charge: Biotechnology, telecom, electronics, software, utilities.  We note promising bottoming behavior in leisure / recreation, health care, and the long-suffering retail sector.  The bottom line: discretion is the better part of valor; let the smoke clear on this market a bit.

RUT:  Now at 364.54 cash, the Russell 2000 mid-caps have a somewhat weaker chart than the S&P.  We see slightly better than 50-50 odds to retest at least the 3-12 cash low (343.06), targeting 320- 325 by mid April.  This would also constitute a test of the Oct. lows.

OTC: Comments re: positives & negatives are similar to the S&P 500 above.  This market needs to rally in the next few days to avoid a “downside stampede”.  A lot of technical damage was in both the Composite and the NDX 100 with the 3-31 plunge.

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 its currency implications.

EC:  Another captive of the War Jitters.  The technical wave 5 top on 3-10 at 1105.80 cash is very believable though it MAY be mildly tested in the next week or so.  The odds are somewhat less than 50-50 of such a test in our opinion.  Now at 1069.50, we see a re-test of the 3-21 low, targeting at minimum under 1050.00 Hedgers are mildly supportive, likely putting a bottom in any near-term selloff. Seasonal weakness ahead in April/ May….We’re on the sidelines.

SF: Similar to EC.  Enough hedging support to propel the current blip rally towards a test of the 3-11 high.  We narrowly favor the view that 3-11 will hold. The Iraq situation, especially given it’s unattractive short-term affects on the U.S. stock market can be seen as a major driver of “stable neutral” forex such as the SF.  On the sidelines.

BP: The first of our “Intermarket Bubble” currencies to break (on 2-06).  The pound is now forming a jagged head & shoulders top.  This is indicative of further likely downside after a serious blip rally here which is likely to hold under 1.5900 (basis June).  Bearish Apr/May lies ahead and a test of the 3-19 low is likely.

AD: Further downside likely.  The short-entry trigger is a break of the short-term upsloping support trendline from the 3-18 low.  Relatively low cost options make hedging an attractive proposition here.

CD: A favorite short situation: high speculation & sky-high implied volatility.  Now at 681.63, the CD may double-top slightly higher in the 682.50 – 684.00 range. Keep extremely tight stops on any longs here & look to exit and reverse to short if hit.

AGRICULTURALS:

S:  Beans are caught in a messy, sideways pattern that is difficult to interpret.  The upside / downside potential appears to favor the bears but we’re on the sidelines.  Meal & oil both look weak as well.

C: A favorite long setup developing… keep extremely tight stops on any position Corn shorts as a major pause in the current 6-month downtrend is upon us.  Odds favor corn ratcheting higher from here into the bullish Apr / May planting season.

W: Very similar to C with a less compelling seasonal outlook.  Keep maximum-tight stops on shorts and look to exist & reverse to long if hit.

LC: Our best guess is that the Jan & Feb highs are secure at this point.  At least a re-test of the March low is likely before a sustainable rally can be launched.  Bearish May/ Jun lies ahead.

LH:   A mixed picture.   The technical pattern on the rally from the Sept low now looks very toppy, & rising volatility confirms the selloff from the 2-28 pivot high.  However, high positive hedging complicates the situation and has us on the sidelines

SOFTS / FIBERS:

SB:  Sugar was a featured “favorite short setup” during our Florida Seminar tour in late Jan / early Feb.  SB topped out nicely for us on 2-19 in the peak bullish season.  We view this as an important top of at least intermediate degree.  Now, bearish Jun / July lies ahead.  Keep tight stops on position shorts and, if hit, move to the sidelines and look for short-side re-entry setups.

KC:  Approaching an important rallying point.  Position longs should have the tightest of stops (currently at 60.00 or lower) and look to exit and reverse to long if hit.  Note bullish April / May ahead.

CT: An on-going favorite short setup. After any blip rally here (which looks like position covering), look to re-enter to the short side.