BISHOP’S MARKET OUTLOOK, 1-10-02

ECONOMIC OUTLOOK

1)     The 2002 economic “recovery” is not likely to start before the 2^nd half of 2002 and is likely to be very weak.

2)     This is not a “recovery” at all, but rather an attempt to continue (“stimulate”) the current business upcycle which began in 1991/92.  Regulatory authorities (Federal Reserve and Federal Govt.) have no experience with managing the continuation of such a long-term cycle.

3)     In Jan. 2002, the ten year upcycle finds numerous imbedded impediments to economic growth:  a) record levels of consumer debt  b) a corporate capital expenditure (“capex”)  bubble  c) a glut of residential real estate  d) a de-coupling of the stock and bond market where interest rates rise when the stock market rallies.

BOND OUTLOOK

1)     The major long-term bond market top in early November is likely to hold.

2)     The bond market nosedive from the November top is at a rallying point. After this rally, lower lows in longer-term Treasuries are likely.

3)     Yield curve is likely to favor shorter vs. longer maturities (“steepening”) to continue.

4)     The credit quality cycle has favored lower risk vs. higher risk bonds for more than 3 years.  As the perception of economic bottoming takes hold, and corporations take on less debt, the risk perception in corporate lending is also likely to fall, favoring higher yield issues over Treasuries.  Look to accumulate medium and higher yield corporate debt closed end funds.

STOCK OUTLOOK

1)     The stock market charts were thrown into major technical disarray by the 9-11 attacks. That chaos is only now starting to clear up.  The shorter-term being clearer than the longer-term at this time.

2)     While longer-term it looks like the 9-21 stock market lows will hold, short-term the market is approaching important near-term tops. Short-term topping targets include: a) NDX/ NASDAQ 100: 1775 by 1-14 to 1-24  b) SP 500: 1188 by 1-14  c) OTC: 2100 by 1-14 to 1-24. (UPDATE: S&P 500 has now reached topping target; the OTC Composite put in an impressive reversal bar on 1-09, making a marginal new high then reversing and closing lower than 1-08).  Also note that stocks on right on cue seasonally, topping in the Jan/Feb timeframe.  We would expect a seasonal low to bottom in early April followed by a Summer rally.

3)     Nimble short-sellers may find fertile ground between a seasonal Jan top and April low. Selected short-sale candidates include a broad list of technology stocks which have bottomed on a daily basis but not on a weekly basis (see “Kryptonite tech stocks”).  However, because the broad indices are unlikely to hit new lows on any pullback, this pullback is not likely to be a broad-based shorting opportunity.

4)     Long-term upside in American stocks is limited by high valuation levels.

5)     The likelihood of a prolonged period of sideways choppiness has increased dramatically. Historically the market has endured very long periods of sideways choppy trends (1930 to 1953, 1965 to 1982) punctuated by long periods of trending to the upside (1954 to 1965, 1982 to 2000). Charts suggest the risk of a long period of sideways activity has increased.

6)     Global markets show risk and opportunity:  a) Remember the Asian meltdown of October 1997?  Many of the “Asian Contagion” markets appear to be near bottom or turning up: Taiwan, Singapore, Japan, Thailand, Australia, India and Russia to name a few.  Note also that many currencies of these countries have also bottomed.

OTHER MARKETS:

1)     METALS:  Gold is in a poorly defined, low-energy pattern.  Both Silver and Copper are in probable “dead cat bounces” with one final downtrend likely to test recent lows.

2)     ENERGY: Commercial behavior and technical chart patterns in all energy contracts is very similar.  These charts are either “dead-cat” bounces or signs of a major low.  I narrowly favor the first view.  If correct, a final major low is likely to develop somewhere between now and the seasonally bullish Apr / May period.  Note particularly the huge commercial net long positions which are VERY BULLISH once a technical bottom is in.

3)     FOREX: European currencies all grinding sideways in “wait and see” patterns.  Meanwhile the Yen (along with the Nikkei) is in a final nosedive to a major low.  Keep tight stops on any Yen shorts.  In the Argentinean chaos, look at the bullish Brazilian Real.  Beware the toppy Mexican Peso with huge commercial net shorting.

4)     GRAINS: Soybeans standout as a bottoming opportunity.  Commercials are very net long.  Look for a bottom in the weeks ahead, rallying to a short-term top in the peak Apr/May planting season.

5)     MEATS: A short-term bullish setup in Live Cattle.  Commercials are net long into the bullish peak Feb/ Mar season.  However, keep tight stops on any long-side trades as this may only be a dead cat seasonal bounce.

6)     SOFTS: Cocoa is the standout pattern.  Very toppy technical charts combined with a peak seasonal top and net short commercial activity. Look for short side trades to develop.