BISHOP’S  MARKET  OUTLOOK, 06-16-03

INTRO:  As described herein, the we’re watching most closely  the upcoming July earnings season for U.S. stocks.  Numerous markets are “pointing” to late June/ early July as an inflection point and earnings season is the obvious watershed event during that timeframe.

ENERGY:  Position longs are stopped out on the 6-12 & 6-13 price plunges which cracked uptrending support lines.  The bearish case for distillates (HO & HU) is better than for crude.  These aren’t outstanding “5-star” type trades but very cheap calls offer outstanding hedges for shorts here.  Energy stocks & futures are at odds, as the common stock patterns look stronger than the commodities.

CL: Longer term we note that a satisfactory 5-wave advance from the November ’01 lows topped out in late Feb/ early March at the height of our “Intermarket Bubble”.  Also note a distinct bearish head & shoulders pattern developing on the weekly chart. Position longs are on the sidelines after final stop out on 6-13’s break of the upsloping support trendline connecting the 5-06 and 5-29 pivot lows.  Crude is now a mixed picture that may slightly favor the bears.  Position shorts should have tight stops at the 6-11 high (32.50 Jul) and/or hedge w/ a cheap long call. Toppy are: the low volatility readings, the weekly & daily wave patterns, and HO & HU. More bullish are seasonals with strong Aug/Sep ahead, mild speculation, and modestly bullish common stocks.  We’re on the sidelines.

HO: Our daily pattern starts from the glaring pivot high on 3-7-03 (8875 basis Jul) during the final blowoff of the “Intermarket Bubble”. Now @ 7422, HO appears vulnerable to test the April lows in the 6750 area.  Also, an ominous H&S is developing around the 3-07 high on both daily & weekly charts.

HU: Ditto to HO.  Note the very low volatility as speculation reached an extreme just prior to the 6-11 high.

NG: A profoundly bearish set-up at the June 6 pivot high. The incredible price collapse has moved a long way in 3 days and is particularly bearish in light of the raft of “news” stories regarding the coming NG shortage, most notably from the Federal Reserve. Further downside looks likely; targeting at least the April lows in the 5000-area basis Jul. However, this contract has fallen a lot already and we would expect some brief rallies to “back & fill” along the way. Note that option volatility appears to be rising from an extreme low several weeks ago. We would expect this to continue, to the benefit of call buyers hedging any short positions.

ENERGY STOCKS: Our view on the U.S. stock market in general is that the indices have a good chance to rally into the July earnings season where they will certainly be tested.  Energy stocks are no exception, looking stronger than the commodities at this point.  Fidelity Energy continues to rally from an important bottom reached 7-23-02.  Most likely scenario is to take out the 6-11 high in this energy stock fund.  The XOI is rising from an important low on 3-12-03 and more short-term upside appears likely.  Ditto for the OSX, rallying from its 8-05-02 and 1-27-03 pivot lows. Also note that the OSX was able to clearly snap a bearish H&S pattern several weeks ago. 

METALS:  During the Florida seminar series in late Jan / early Feb, we highlighted the metals as part of an “Intermarket Bubble” involving unsustainable speculative rallies in gold, currency, bonds, & energy. 

GC: An interesting short-side situation.  The Feb 5 high reached at the height of the Intermarket Bubble looks very safe in the current weak summer season.  We’re targeting the April 7^th lows under 325 (basis Aug).  Gold is particularly weak in EC & SF terms where gold’s 2003 highs failed to take out their 2002 peaks.

SI:  After a blip rally here, short term we expect a bit more downside to test the March & April lows in the 435-440 area (basis Jul) over the next few weeks during traditionally bearish June / July.  If so, the longer term is carving out a ragged but bearish descending triangle which if broken would target the 2002 lows in the 425 range and perhaps even the Nov. ’01 lows near 400 continuous.  The economic message of such silver softness would clearly imply below-average global growth.

HG: Another interesting short setup in the metals as copper again has approached the top of its 3-year price channel (80.00) and failed.  We look for a test of the 4-24 low (7100 basis Jul) over the next month or so.  Position shorts have stops at 78 or tighter.

PL: Just as the “shelf” of lows from late ‘98 thru July ’99 constitutes a major low for PL, we expect the March ’03 high may be a major top.  That PL did not rise in EC, SF, or BP terms during the rally from the 4-30 low makes this rally much more “dollar weakness” than “platinum strength”. We now expect at best an upside test of the 5-27 high (677.50 Jul) & a failed re-test of the 3-10 high (694.00) followed by a plunge to the 600.00 area. Position longs have very tight stops at or above the 3-point support trendline connecting the 5-5 and 6-11 pivot lows.  That stop value is currently in the 645 area & if broken we would look to reverse to short.  On the flip side, longs might consider the PL-related stock SWC, as it appears to have bottomed on both weekly & daily charts.

BONDS/ NOTES:   What’s behind the recent rally to new price highs? We suspect Fed open-market operations (buying Treasuries, especially the short end) in an all-out attempt to support the struggling U.S. economy. Since early May the 10/2 and 30/10 yield ratios (yield curves) have steepened to their highest levels in over 2 years.  This is not a vote of confidence in a strong U.S. economy as many economists are predicting.  Bonds are probably most vulnerable to a narrowing of this and other spreads and the short end appears more vulnerable to a rate rally than does the longer end. 

TY: Note how rising price relative strength in the TY vs. both the Schatz & Bund in early May foretold this latest rally to new price highs.  Ditto for the widening 10/2 and 30/10 domestic yield ratio increases.  In general we regard this situation as toppy and position longs should keep the tightest of stops. The situation is clearest in the 2-year as described below.  Note also the rising open interest driving the recent rally.  This will need to unwind soon, most likely pushing prices down.

TU, FV:  Position longs adjust stops to max-tight as the 15-month rally from the March ’02 lows looks very toppy here.  Stops at or above the 6-12 lows (108.12 basis sep) look appropriate here. If hit look to exit and reverse to short.

CORPORATE:  Even as corporate spreads have continued to fall over the past few months, the corporate / treasury “quality spread” has widened as T-rates have plunged. We would expect this trend to terminate very shortly.

STOCKS: After any blip selloffs in the next few days, we would look for a BIT more upside here, into at least the early July earnings season.  Peaking bonds also point to at least a short-term impending top in stocks and July earnings is the next “watershed event” on the horizon.  Assuming such a selloff, longer term we have no reason at this point to believe that the October ’02 and March ’03 lows are not safe.

SP:  A major bullseye call from our 4-01-03 Outlook: “….  Should this market rally we would expect the following groups to lead the charge: Biotechnology, telecom, electronics, software, and utilities.  We also note promising bottoming behavior in leisure / recreation, health care, and the long-suffering retail sector…”  Indeed, all but software and healthcare outperformed the major indices, with Biotechnology, Electronics and Retailing particularly strong.

Our best guess now is for a blip pullback to perhaps the 940-950 area followed by a re-test of the 6-06 high (1007.70 cash) during the July EPS season.  Heads up: we note the incredibly low SP option volatility…a sign of a complacent market.  Not only does this bolster our July topping expectation, but offers some low-cost hedging to any short positions that might be initiated near the top.

RUT:  Ditto the SP as we look for a blip selloff here followed by a re-test of recent highs, most likely in the upcoming July EPS season.

FOREX:  Several watershed events are looming on the currency horizon: 1) A top in U.S. stocks and  2) A back-up in U.S. interest rates.  The second situation is almost certainly bullish for the dollar.  A top in U.S. stocks is less clear.  Assuming that we see a “global top” then it’s conceivable that globally we might see a rush out of stocks and into “safe havens” such as dollar-denominated fixed income which WOULD be bullish for the dollar.  Otherwise, a more isolated decline in U.S. stocks would likely be bearish for the dollar.  As we think a global stock selloff is more likely, both of these potential watershed events would be bullish for the greenback.  This in fact is in keeping with our chart reading which sees a “bit more” upside in FX likely to terminate shortly.  A third event, the likely narrowing of the US / European yield spread is also bullish for the dollar.  Also note that June is often the peak of the bearish season for the dollar.

EC:  Strength on both daily & weekly charts has us looking for a short-term selloff followed by a final retest of the 5-29 high (1188.40 cash).   What might prompt such a final “push to the top”?  One likely culprit: a top & selloff in U.S. stocks which we expect in the weeks ahead (see stocks).  Otherwise EC is very toppy and risky especially for speculative longs.  Note the high open interest which also foretells a top ahead.

SF: We think the top is in or very near on cash SF.  Note the volatility peak at the recent highly speculative 5-27 high (7837 basis Sep).

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.

CD: An interesting short situation.  Note the incredibly high option volatility.  Position longs consider selling calls at these prices.  Bearish “wedge” developing on daily chart.

AGRICULTURALS:

S:  With the blowoff reversal bar in the peak season on May 20^th, beans completed a 16-month 5-wave advance from their Dec. ’01 lows.  We like the bearish side of Oil & Meal more, given the recent volatility peaks in SM and the extreme speculation. Shorts have stops at or under the 6-10 high in SM (196 July), the June 5&6 highs in BO (2250 Jul) and along the resistance line connecting the 5-20 and 6-10 soybean highs (currently 635 or less basis July).

C: Continues to slither sideways in a poorly defined choppy pattern. It looks on balance bearish but the erratic chart has us on the sidelines.

W: Very erratic chart. We’re standing aside until a discernable pattern emerges.

LC: Short-term favors the downside.

LH:   Position longs here have the tightest stops, at or above the 6-12 low at 66 basis July.  Very vulnerable to a selloff. Extreme complacency in options provides a low cost hedge to a short position here. A favorite short setup.

SOFTS / FIBERS:

SB:  Sugar was a featured “favorite short setup” during our Florida Seminar tour in late Jan / early Feb.  On Feb 21,22, & 23 SB broke 800 (basis Jul) then crashed over the next 4 months to close 6-13 at 652.  At this point sugar shorts should have the very tightest of stops and/or consider the inexpensive low-volatility calls as a hedge.  Sugar is now completing at least an intermediate low in the reliably bearish summer season with a 5-wave selloff pattern from the Feb highs.  Bulls are watching from the sidelines for attractive low-risk entries.

KC:  We expect at least a few more days to the upside. Thereafter, Jul/Aug is frequently bearish. For now, we’re standing aside in this erratic market.

JO:  Close to a tradable bottom in max-bearish June. Position shorts have max-tight stops at or under the 6-11 pivot high (8600 basis Jul) and reverse to long if hit.  Bullish October lies ahead and other conditions are favorable for a rally.

CT: Look for at least a few days of upside follow thru in the rally from the June 4 low. But peak seasonality is behind us (May) and the rally is primarily position-unwinding as reflected in the shrinking open interest. We prefer to watch this market closely from the sidelines.

LB:  Our best guess is a bit more upside to test the Feb highs (287) followed by a selloff into seasonally bearish Aug/Sep. We’re standing aside for the moment.