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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.