BISHOP’S
MARKET
OUTLOOK, 10-15-03 FINANCIAL
EDITION SUMMARY INTRO:
Pronounced inter-market setup underway.
U.S. interest rates rising faster than
foreign rates as dollar falls and stocks setup for
marginal new highs in October earnings season.
We look for this relationship to unwind in
the late Oct to mid Nov timeframe.
Already-softening metals take inflation
pressure off the rate rally. ENERGY:
Looking for continuing blip moves to the
upside over the next few weeks, especially as long
as dollar remains weak.
Other short-term positives to note are
rising volatility and a positive speculative
pattern. The
bearish Dec / Jan seasonality ahead has us looking
for a rally only as far as the dollar sinks.
Natural Gas chart is more orderly than
crude and distillates and probably has better
upside potential. CL:
Crude is in an unconvincing blip rally.
Rising volatility from the mid-July lows
and a fair amount of speculative fuel lends
short-term bullishness. Position bulls look to
still-cheap puts as possible hedge. HO:
Very similar pattern to CL.
Look for short-term blip upside, nothing
more at this point.
Vulnerable to any rally in DX. METALS:
A mixed picture.
Recent metals strength particularly in
silver is probably reflective of a modestly
improving economic outlook (the same outlook
contributing to the bond selloff and dollar
strength). But
much of the upside moves are probably behind us
and we’re selectively looking for short side
opportunities here. GC:
A top is likely in as gold sells off and O.I.
shrinks in huge position-unwinding.
Weak vs. all forex. Bearish mini head &
shoulders forming in the several weeks either side
of the Sep 25 huge blowoff reversal bar.
In further sign of a top, volatility is
beginning to decline slowly, along with the price
selloff, after reaching a 2 year high at the Sep
peak. SI:
Very ditto pattern to GC as O.I. plunges
with the Sep 25 blowoff reversal bar.
HG:
Currently very toppy. Position longs take some
profits and tighten trailing stops to 87+, basis
Dec. Exit to sidelines if hit.
Longer-term, the copper strength in
seasonally bearish Sep / Oct AND the breakout from
2 year congestion can only be seen as economically
bullish signs. PL:
In the 7-31 Outlook we noted: “… a
final blowoff climax to the 720 area is not out of
the question we see the probability at under 50%
vs. substantially greater downside potential…”
While the upsloping support trendline from
the Jun lows has kept position longs in this
trade, those stops should be max-tightened at this
point to the 700 – 705 area basis Jan.
and/or consider the cheap puts as a
downside hedge.
Look to reverse to short if hit. BONDS/
NOTES: Domestic
interest rates have risen faster than most foreign
yields as DX has weakened.
The current inter-market mix of bonds /
stocks / and FX is likely to reach at least
short-term extremes in the late Oct to mid Nov
timeframe at which time we would look for DX and
US to bottom.
Our most common target prices are
approximately 2 points below the current Jul and
Aug lows in these contracts.
The move to higher post-summer yields
should be enough to pressure SP at least to it’s
cluster of upsloping support.
The softening metals prices and
unconvincing energy rallies should take inflation
pressures off yields also, helping to soften the
current treasury selloff. US:
Longer-maturity bonds appear
somewhat less likely
than the short end to take out the Summer lows. A sign of curve flattening as the economy strengthens ?
Volatility extreme also indicates that
we’re likely near at least an important rallying
point TY:
After
the counter-trend rally in Sept peaked out, TY
looks likely to takeout the Jul / Aug lows by 2
points or more by early to mid Nov. Position shorts have stops at 113.00 basis Dec and are
looking at the sale of expensive puts for hedging
and income. TU,
FV:
A
lot of bearish speculation in the TU.
Bearish head & shoulders forming on the
weekly continuous chart.
Highly likely to take out the July
continuous lows in the weeks ahead.
Ditto for FV. STOCKS: As of mid-Oct, both
narrow and broader indices remain lofty during the
quarterly earnings season.
Longer-term this has to be seen positively.
In the shorter run we think the indices are
likely to “plateau” as open interest
consolidates.
In the face of likely rising interest rates
over the next few weeks, we would expect stocks to
eventually feel some pressure and retrace to at
least their “intersections
of support”.
In the SP look at the confluence of two
upsloping support trendlines (1) from the March to
Sep lows and
2) from the Aug to Sep lows) and horizontal
support from the June wave 3 pivot high, currently
in the 1025 (cash) zone.
Such a pullback is likely to co-incide with note and bond selloffs to
new post-June lows.
Is the support latticework likely to be
broken ? With the passing of the Sep / Oct
“danger zone”, it’s looking increasingly
unlikely until after the Dec / Jan bullish season.
The severity of the bond selloff is the
likely determining factor.
If Bonds make a marginal new low as we
expect by mid Nov, within 2 points or so of the
Jul / Aug lows AND if the greenback then stages a
rally, which we also expect, both of those
factoids will lend inter-market support to stocks
and cushion the extent of any selloff in the
indices. The long-awaited and continuing improvement in the outlook for both the
Japanese economy and the Nikkei provides major
support to stocks globally.
While the Nikkei bottomed several weeks
after the U.S. indices last bottomed in March,
since that time the Japanese market has
outperformed the U.S.
We’ve written for the past few years that
a strong rally in Japan was a necessary predicate
to a strong global stock rally.
Indeed that’s exactly what we’ve seen
over the past 6 months. SP:
See notes above. RUT:
Speculative levels show limited additional
short-term upside.
Position longs have stops at 517 cash or
higher. Also
see very cheap option hedging opportunities as
volatility remains comatose. FOREX:
We look for an important bottom in DX of at
least intermediate magnitude by late Oct to mid
Nov. One
important trigger is likely to be the rising
domestic / foreign yield ratio which will
eventually attract portfolio investment in the
rising U.S. yields. EC:
Technically
likely to marginally take out the June cash highs
in late Oct / early Nov.
The major move is probably over and
position longs should keep tightest of stops as
speculation is increasingly bearish.
JY:
Though more upside is possible longer-term, the
yen is currently very toppy.
Position longs to to max-tight stops (at
9045 or higher basis Dec) to lock profits and/or
look to sell calls for income and hedging.
Very bearish short-term situation
developing.
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