BISHOP’S  MARKET  OUTLOOK, 4-01-02

CRB: From 3-15:”….A number of significant breakouts from energies to metals to grains, even coffee have combined to generate a technically important breakout in the CRB…” Near-term, however, this index is now extremely toppy and ready for a pullback. Look for one or more major commodity groups to retrace near-term. Likeliest candidates: SB, LB, CT, KC, and various Metals.  Grains and energy likely to remain stronger.

ENERGY:  With recent breakouts, major bottoms are confirmed and longer-term substantial upside is likely. Near-term, however, commercials are moving to very bearish net short positions.  Will the Energy contracts pullback at least briefly prior to any final move to an Apr/May seasonal high? The answer probably lies OUTSIDE of Energy. For example, a sharp selloff in U.S. stocks and/or weaker-than-expected economic reports could easily trigger at least a mild energy selloff near term.  Note suspicious strengthening in the Transport stocks, which often move counter to Energy.

HO: From 3-15:….” Keep very tight stops on any longs…” Commercials are moving to extreme net short positions ahead of the peak Apr/May season.

HU: From 3-15:…” Keep very tight stops on longs…” Peak season ahead and commercials very net short.

CL: From 3-01: “…Keep very tight stops on any CL longs. The CL rally continues as commercials hit the highest net short levels in 2 years.  Will CL pullback or continue to rally into Apr/May peak?  Keep very tight stops.  Longer-term the CL / XOI ratio is supportive.

NG: Technically poised for a pullback under 3.00 in the days ahead. NG may lead a short-term energy selloff. Over the next few months we feel there is at least one more rally likely to take out the 3-26 high. Longer-term NG remains very bullish.

METALS: Commercials are at very bearish net short levels now. Play any short sales very tight as metals are likely in longer-term uptrends. Next 2 months is generally a bearish bottoming season. Longer-term, recent new highs confirm technical bottoms in some markets.

GC: Expect 02-08 high to hold as commercials are very net short and bearish Apr/ May lies ahead. Longer-term, higher highs are technically likely.

SI: Commercials going to largest net short position in over 2 years. Bearish Apr/ May lies just ahead.  Our preferred strategy is to step aside or look for a swing short trade when and if SI hits the highs of the current channel in the 4.70 area. Don’t be fooled by the technically bullish ascending triangle. If it breaks to the upside it’s probably a bull trap.

HG: From 3-15: “…A favorite short situation…HG is now at a short-term top with very net short commercials. See also the toppy LB contract…”  HG remains on our favorite short sale watchlist. Commercials hugely net short ahead of the bearish May/ June bottoming season.

PA: An on-going favorite short situation from 1-31. PA has remained flat. Favoring the short side with stop @401.

PL: Remains short-term very toppy.

BONDS/ NOTES:  What a difference 2 weeks makes!  Economic reports have generally been supportive of the view that the economy is strengthening and our “leaders” in Washington managed to pass a fiscal stimulus. Add to that the CRB uptick and a stalling DX. With this combination the toppy bond and note charts backed up easily.  Where from here?

US: From 3-15: “….lower prices should attract commercial buying…”. This is exactly what we’re now seeing. Short-term we’re sharpening targets to the 96-16 to 97-00 range basis June with 94-16 on the outside. After that, look for a meaningful short-term rally (consistent with a stock market and CRB pullback) to develop within the longer-term downtrend.  Commercials are at 2-year high net long levels consistent with the 4 most powerful rallies of the past 24 months. Note also that interest rates (CBOE TYX) hit their short-term 5-wave target zone on 3-21 at 5.86%

TY: Any short-term downside is likely to be over by 1st week of April and to hold above 12-17 lows.  This sets us up for a swing rally. Commercials are now at net long levels consistent with the May and July 01 bottoms.

CORPORATES: We’ve liked the mid-grade Corporate / Treasury bull spread since 1-04.  Our selected corporate closed-end funds have held above their Dec. lows while continuous Treasuries have not.  We continue to like accumulation of mid-grade corporates in the face of credit quality spread improvement.

STOCKS:  From 3-15: “…In hindsight we will likely find the 1-07 and 1-09 highs to be a major Wave 1 top, followed by a major Wave 2 bottom on 2-22…an April pullback, if any, is likely to HOLD above the 2-22 lows…then looking for a strong Summer rally on the back of the introduction of single stock futures…”   Today I’m somewhat less convinced of the “2-20 lows hold” thesis, largely due to the lagging performance of the OTC & NDX. 

Breaking the market into key factoids: 1) Commercials are very net short consistent with a substantial selloff in the weeks ahead.  2) April earnings season looms, always an inflection point (Oct was a bottom, Jan a top….April a bottom ?)  3) April often brings seasonal weakness and a bottom in stock indices  4) Technically, the Dow and RU2000 have made textbook wave 5 tops from the 9-21 lows.  The SPX would complete by at least touching the 1-07 high which it missed by only 3 points on 3-19.  The Dow Trans looks highly likely to make a new post-921 high in the days ahead. Meanwhile, the OTC and NDX are the weakest of the lot and near-term rallies to take out Jan highs look less likely.  5) All indices are poised EITHER for A) a short “blip” rally, over by April 10th, to take out their post-921 highs followed by a mid-April selloff  OR  B) an on-going plunge into mid-April because the post-921 highs are already in.  6) A stock market selloff in the next few weeks would be consistent with a selloff in the CRB and a bond rally over the same timeframe, both of which I’m expecting for independent reasons.

OTC/ NDX: From 3-15: “…  Note the number of larger-cap NDX stocks rotating from “final downturn” to “bottoming” including: CMVT, PMTC, ATML, NXTL, SANM, JNPR, QCOM, VRSN, CTXS, JDSU, HGSI, DISH, LLTC, MOLX, NTAP, YHOO, CNET, AMCC, and ITWO.  While numerous NDX stocks are still in downlegs, because they tend to be smaller-caps their weightiness on the index is lessened…” This optimism now looks premature. Note the backing-up of some of these hopeful rallies in stocks such as CMVT, CIEN, JDSU, VRSN, and JNPR. Also see the collapse in ORCL.  Meanwhile the buoyant chip equipment stocks (AMAT, KLAC, NVLS) are getting toppy.  Other “nice movers” are also stuck: PAYX, INTC, SEBL, and DELL and several high fliers are cracking down (CDWC, PCAR, USAI, BMET, BBBY).  Thus the NDX internals favor the downside near-term. 

The good news is that the “knot” of collapsing tech stocks we’ve seen since 1-09 (including the “Kryptonite Tech Stocks” from our 1-04 Outlook) is 1) thinning out somewhat  and  2) hitting “final stage” bottoming patterns.  A blip rally is looking less likely here and something that would take out the 1-09 OTC high looks very remote. Any rally must move swiftly and hold the 3-26 lows to have any credibility. That said, the 2-22 lows look more vulnerable to an April pullback than do the other indices. NDX commercials moving to unambiguous net short levels.

SPX: Can we rally in the face of the second highest net short commercial position in the last 3 years (Bearish Mar 2000 was the highest net short)?  About even money of the “quick blip” scenario to hit 1178 – 1190 by April 8th, then collapsing into mid April.  Again, this rally has to be swift and hold the 3-26 low.

DOW: From 2-15: “…the Dow Industrials and Russell 2000 are in positive patterns vs. the less clear S&P 500 and OEX. The NDX and OTC are most bearish of the lot.”  From 3-01: “…Today the Dow pattern remains very much to the short-term upside with a target above 10,400 by mid March…”  From 3-15: “…Today the DJIA has likely one final blip rally left to take out the 3-08 high and hit, say 10,700 plus by month’s end…”  We’ve had the blip rally and taken out 3-08 (by only 10 points !).  Not much near-term upside remains, if any.  The Dow may languish sideways here, waiting for a clear signal from the OTC.

RUT:  From 3-01: “…The Russell 2000 has an orderly Elliott pattern with a clear turning point bottom on 2-22.” From 3-15: “… Currently targeting the 514 to 530 range by early April…”  As of 3-28 the RUT rally has continued, hitting 509 and now in a picture-perfect Wave 5 topping zone.  Very similar pattern to the Dow.

            SPECIFIC STOCKS SHORT:  Our short sale selections over the past several months were largely stopped out for good profits in recent rallies.  (entry price, current price, % profit, current stop) from 2-15:     CPB (26.58, out 3-20 @ 26.90, -2%).  From 3-15: BEAS (15.29, 13.71, 10%, 14.95) PMCS (16.25, 16.28, 0%, 17.70) BRCD (25.54, 27.00, -6%, 29.10) FLEX (16.67, 18.25, -9%, 20.55) TLAB (11.13, 10.47, 6%, 10.90)  CHKP (32.17, 30.40,  5%, 34.00)

SPECIFIC STOCKS LONG: The recent stock rallies have lifted our long selections as follows: from 1-25: MO (49.90, out 3-19 @ 51.30, 3%) SBUX (22.88, 23.13, 1%, 22.35) from 2-15: SBC (37.12, out 3-21 @ 38.10, 3%) TXN (31.50, 33.95, 5%, 31.70) NSC (21.30, out 3-22 @ 22.65, 6%) UIS (11.95, 12.63, 5%, 11.85) DD (44.90, out 3-20 @ 46.65, 4%) ADBE (35.69, 40.29, 13%, 37.70) OPWV (6.21, out 3-20 @ 6.23, 0%) SRI (8.40, out 3-26 @ 9.65, 15%) CDMS (10.75, 11.95, 11%, 11.10) VVI (25.33, 28.00, 11%, 26.55) WDC (5.98, 6.23, 4%, 5.80) LION (7.45, 7.75, 10%, 8.20) OS (6.05, 7.60, 25%, 6.85) ROC (5.16, 5.08, -2%, 4.81) FPF (3.38, 3.29, -3%, 3.17) TTF (4.85, 4.95, 1%, 4.58) TRF (20.00, 27.10, 35%, 23.15) EWS (5.61, 5.78, 3%, 5.50) EWJ (7.27, out 3-26 @ 7.93, 9%) EWA (9.68, 9.90, 0%, 9.62) IFN (10.82, out 3-22 @ 10.75, -1%) COY (9.04, 8.95, -1%, 8.70) KYT (8.13, 7.86, -4%, 7.83)

FOREX: Heading into the Apr/May period where products invoiced in dollars (Oil, Grains, etc.) rally, pushing up demand for the greenback.  Numerous currencies (JY, AD, CD, etc.) likely forming major bottoms.

            DX: From 3-15: “….Getting very toppy in this approaching peak season. Commercials getting very net short. The DX will likely struggle to barely take out the July 01 high on any seasonal peak rally here…”  The DX chart still looks like one final upside test ahead.

Euro: A favorite short on 3-15, it looks like we caught the high to the day, closing 3-15 @ 8791 basis June with a textbook reversal bar. Now at 8682, we’re targeting 8400 by mid to late April. Note the negative season ahead and very heavy commercial net short position.

BP: Short-term look for mild pressure on the 1-25 cash low @ 1.4065.  Now targeting a mild break under 1.4000 by mid to late April. At this point, the June 01 lows still look relatively safe.

SF: Conditions have changed since our erroneous long-side call on 3-15.  The muddled picture is now technically bearish. Favor the downside short-term.

            JY: From 3-15: “… A re-test of the Feb low is plausible on short-term charts…” Now at .7540, we expect a continuing short-term slide to test .7300 and put in a major long-term bottom. The curious plunge in the commercial position to slightly net short is further bearish evidence.  Earmarks of a “soft Yen” Japanese policy perhaps? Note the constructive Nikkei chart (the EWJ WEBS on the AMEX), which after a 2-week breather appears likely to test its recent 3-11 high.  If so, a continuing rally in Japanese stocks will help to put in a long-term JY bottom.

ME: From 3-15: “… One final blip rally (in conjunction with DX?) might still be left in this thing but it’s as toppy as ever…”  Well, we got the blip rally to take out the stubborn Feb high. A 5-wave Elliott sequence is now complete from the Sept & Oct 01 lows. Commercials are off-the-charts net short. Very bearish.

            AD: Longer-term, substantial upside is likely in both Aussie FX and stocks (see EWA, Australian WEBS). Short-term keep very tight stops on any AD longs as the commercials are selling heavily net short into the current rally from their supportive net long levels at the Jan. lows.

            CD: A major bottom in sideways pattern continues to evolve.

MEATS:  The peak Feb/Mar season is behind us.

LC: A bullseye favorite short on 3-15 (@ 7235 basis April). We now look for a blip rally to, say 7150 followed by a continuation of the downtrend started in Feb. Longer-term the Nov 01 lows may be tested as commercials are still very net short and bearish May/ June lies ahead.

LH: From 3-15: (@ 54.750 basis April) “…Commercials flat with bearish seasonality ahead. The length of the selloff from the 2-05 high basis April makes the downside more likely from here…”  Now at 51.875, keep tight stops on shorts as commercials are moving to net long in support of at least a blip rally.  Thereafter a downside test of 50.550 seems most likely.

GRAINS:  Bullish seasonality ahead.

W: From 3-15: (@ 282.25 basis May) “….Technically look for the current May Chicago W rally to hold under 295 then selloff into a May/June bottom….” Well we hit a high of 295 precisely on 3-27 before the massive bearish engulfing bar on 3-28 touched 297 and crashed to 280 !!  Where from here? Higher prices are likely despite weak seasonals ahead. After any brief pullback here, commercials are technically supportive of at least one final rally to takeout 3-28.

            S: A favorite long situation on 1-04 and 2-15 (441 basis May).  From 3-15: “… Now at 468, keep very tight stops on longs…” Long-term position players going into Apr/May should keep stops above 455 here.  Beans are short-term very toppy. Expect another pullback lasting a few days with major support @ 459 and 455.  Commercials are gravitating towards net shorts but are not yet at planting season extremes.  Look for prices to continue to rise into the peak months ahead, targeting July 01 prices in the 520 to 530 range.

C: From 3-15 (@ 205.75): “…A favorite long situation with a nice 5-wave bottom from the July 01 highs, basis May. Very bullish commercials are net long ahead of the Apr/May peak season….” Now at 202.50 this still looks like a bottom. Note also the climax-level volume on 3-28 and the outside engulfing bar.  Open interest remained flat on this huge-volume day; footprints of liquidation by short speculators.  Has musical-chairs position-unwinding begun?  If so, it’s likely to favor the stronger-money commercial bulls over the weaker net short specs.

SOFTS / FIBERS:

            CO: A continuing favorite short on 3-15 (@ 1559 basis May). Now @1494, commercials are moving off extremes but remain very net short.  They’ll need lower prices to step up and buy in quantity to halt this slide.  Very bearish.

            SB: From 3-15: “…Keep very tight stops on any longs…” One more downleg remains likely with a major bottoming target in the 5.25 area.  We’re sharpening our downside target timeframe to April 9 – 15th.

OJ: Right on cue, commercials are now selling short nicely ahead of the Apr/May peak season. Sharply rising open interest indicates we’re not quite at the end of this move. Look for this rally to break Nov 01 highs in the 96.20 to 99.00 range with target potential sharpened to 99.00 – 102.50 by early May.

CT: Commercials are moving into a toppy net short zone again.  Setting up for a tradable downside blip or better. The season is still bullish so keep tight stops on any shorts.  We might get lucky and stumble on a major downside move here, as both weekly and daily charts are poised for at least a meaningful retracement.

KC: From 3-01: “….Setting up for at least a brief rally. Commercials going net long with chart at a technical bottom….” From 3-15 (@ 54.75): “…More short-term upside is likely in this bullish peak Apr/May KC season….”  Now at 57.20, keep VERY tight stops on any longs as the rally-ruining KC commercials are moving sharply to 3-year record net short levels.  Longer-term, the post-2001 breakout points to higher highs after any sharp near-term selloff.

LB: From 3-15: “…. One final blip is likely on a technical basis to suck more long specs in. May soon become a favorite short situation….” So far we have this forecast precisely with a blip rally from March 18th to 22nd, slightly breaking the 3-08 high then rapidly selling off.  The bearish season lies ahead.  See also toppy construction-related HG.  Look for shorts.