BISHOP’S
MARKET OUTLOOK, 08-01-03
INTRO: Since
our Striker 6-16 Outlook, we’ve seen the
following forecasts unfold: 1) Top in bonds 2)
Bottom in U.S. dollar 3) Apparent double topping
behavior in U.S. stock indices in the July
earnings timeframe. For the month ahead the
pivotal market will probably be U.S. stocks with
important implications for global interest rates
and currencies. Note the bearish setups developing
in energy, particularly HO and HU.
ENERGY: Although final short-term rallies
in seasonally strong Aug/Sep are possible, energy
generally looks toppy with HO and HU particularly
vulnerable to massive selloffs. Weakness in Oil
sector stocks adds to bearish outlook. Position
longs have tightest of stops. Cheap options add to
strategic alternatives. NG moving completely
opposite crude complex. Gas price plunge may have
final leg down, but rising speculation says the
bottom is not far off.
CL: We remain on the sidelines in
this erratic market. 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. The most
obvious CL factoid is the “dirt cheap” option
premium reflecting an extremely complacent market.
While seasonally strong Aug/Sep is moderately
bullish, any upside is probably under $33. Now at
$30.68 (Sep), a downside plunge would takeout
April lows in the $25 area, targeting $21-22.
Consider: cheap put spreads, short CL w/ call
covers, or watch for break of upsloping support
trendline connecting the April 29 & July 23rd
lows.
HO: An ominous H&S is developing
around the 3-07 high on both daily & weekly
charts. While a final blowoff rally to test the
7-11 high in the 83.00 range can’t be ruled out,
this market is toppy to the extreme w/ peak Aug
seasonality just ahead, massive speculation and
complacent volatility. Position longs have
tightest of stops along the support trendline
connecting Apr 29 & July 23rd pivot lows
(currently 77.00 or higher, basis Sep) and/or are
covering with inexpensive puts. Very interesting
short-side setup developing…we’re watching
closely from the sidelines.
HU: Ditto to HO and CL.
NG: A major bullseye call from our
6-16 Outlook (Sep @ 5.80): “…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 [Sep].
Now at 4.668, NG plunged through the April lows as
predicted. Further downside is possible but Gas is
completing an orderly 5-wave decline from the
height of the “inter-market bubble” we
described in February. Short speculation rising.
Position shorts now have stops at 5.20 and below.
Leave a few contracts on, targeting 4.000 but take
profits on majority of position if laddered stops
are hit in the 4.800 and 5.000 areas. Everything
off at 5.200.
ENERGY STOCKS: With Fidelity Energy
and the OSX both topping out in mid June, the
bearish case for CL, HO, and HU increases.
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: Our 6-16 Outlook was for
short-term downside. Aug GC had a 4+ week selloff
from 360 to 342 but stopped short of our outside
targets around April’s 325 lows. The pattern is
now a mixed picture. Slightly bullish: hedger
positions, GC rising modestly vs. DX and most
forex, hints of economic improvement, traditional
summer seasonal weakness is past, ascending
triangle on the charts, and bullish behavior in
other metals…but the erratic “look” of the
market has us on the sidelines for now.
SI: Very impressive recent silver
breakout after bottoming in seasonally weak June.
Silver has cracked recent highs and tested May
’02 and Jul ’02 three year extremes. SI is now
very overextended and in need of a “pause and
pullback” to refresh. Thereafter, higher highs
are likely, particularly as we head into
seasonally strong Jan / Feb.
HG: After our 6-16 Market Outlook,
HG staged a 3 week / 4-cent selloff to the 75.00
area (Sep). The strong ensuing rally to 81
reinforces the bullish “ascending triangle”
pattern on the longer-term charts. Along with the
recent SI rally, copper strength is reflective of
a slight improvement in the overall U.S. economic
outlook. While the longer-term outlook for copper
may be positive, position longs should have the
tightest of stops at 79.00 or higher and reverse
to short if hit. HG speculation is reaching
extremes and an erratic 5-wave advance from the
Nov. ’01 lows is now complete.
PL: Very interesting bearish
situation developing. Our forecast from the 6-16
Outlook is unfolding as expected: “…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. ..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 Jul) Position longs have very tight
stops at or above the 3-point support trendline
connecting the 5-5 and 6-11 pivot lows. On the
flip side, longs might consider the PL-related
stock SWC, as it appears to have bottomed on both
weekly & daily charts. Now at 685 basis
Oct, platinum has completed a “failed re-test”
by kissing it’s 3-10 high. Position longs should
continue to hold stops along the upsloping
trendline connecting the 5-5 and 6-11 lows (and
several other pullback pivots). While 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.
BONDS/ NOTES: From our 6-16 Outlook:
“…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…” In
hindsight we’ve learned of massive intervention
not by the Fed but by foreign central banks
looking to support the dollar (and soften their
own domestic currencies to protect their export
competitiveness). Bulging federal deficits add to
downside pressure. Our 6-16 interest rate outlook
was one of our most accurate bearish calls as the
bond and note plunge began in earnest on 6-16!
Looking back we believe a VERY MAJOR BOND TOP is
now in place as of 6-13.
TY: From 6-16 Outlook (119.17 basis
Sep): “…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…” Indeed those tight long
stops were broken on 6-17 and TY plunged to hit
111.30 yesterday. Position shorts should now
tighten stops along the downsloping resistance
line connecting the 7-14 and 7-23 pivot highs (now
at 112.30 or lower) and exit to sidelines if hit.
A corrective rally can be anticipated soon
although longer-term further downside is very
likely.
TU, FV: Ditto to TY
CORPORATE: Another great call from
the 6-16 Outlook: “…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…” Indeed, most major quality
spreads began collapsing along with the Note &
Bond selloff. Look at the sharp narrowing in AA
Corporates vsTY, A Corporates vs. TY, and BAA
Corporates vs. TY.
STOCKS: From the 6-16 Outlook: “…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…” At this point
we’ve gotten the double top scenario (tops in
June and July) right on cue in July earnings
season. The strength in the 7-31 rallies makes it
somewhat more likely that the indices may indeed
make a run at one additional marginal new high in
the days ahead. In general position longs should
have the tightest of stops along the upsloping
support lines connecting the July 1st and July
21st pivot lows. If upside continues, tighten
stops along this line and if broken look for good
seasonal short-side trades heading into bearish
Sep / Oct. We reiterate that at this point
we see no reason why March ’03 and Oct. ’02
lows should not hold in any pullback.
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.
From our 6-16 Outlook: 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. Following our
6-16 report, the S&P pulled back to the 952
area on July 1st. then rallied to re-test 6-06
exactly as forecast. We note the continuing sleepy
options, indicating that upside may not quite be
finished. This is bolstered by the strength of the
rally on 7-31 as this report goes to print.
Position longs have the tightest of stops as
described in the Stocks introduction above. Longer
term, past any Sep / Oct seasonal weakness, the
fact that these indices held up against both
rising interest rates AND July earnings is very
constructive.
RUT: From 6-16 Outlook: “….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….” Again the RUT
situation is very similar to the S&P, position
longs keep tight stops as described in stocks
introduction. Speculative behavior in RU indicates
to us that this current rally is about topped out
with rising vulnerability to a selloff into
seasonally bearish Sep/Oct.
FOREX: From 6-16 Outlook: “….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… 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…. Our
highly “dollar bullish” outlook of 6-16 has
played out nicely with plunges in EC, SF, BP, and
a delayed but sharp selloff in CD. Our shorts were
stopped out for nice gains during the forex
rallies on July 24th and 25th. As we can make a
case for both forex upside or weakness over the
next week or so, we’re watching current activity
closely from the sidelines for more clarity.
AGRICULTURALS: Note the great short-side
calls in the soy complex from our 6-16 Market
Outlook.
S: From 6-16 Outlook: “… We
like the bearish side of Oil & Meal, given the
recent volatility peaks in SM and the extreme
speculation….” Dec BO plunged from 21.60
to 19.39 and SM from 169 to 155 over the 6 weeks
following our June report. We now expect at least
brief counter-trend rallies here, failing to break
June highs. Position shorts have max-tight stops
and exit to sidelines if hit.
C: In the 6-16 Outlook we noted
“on balance bearish” but were on the sidelines
due to erratic chart appearance. We now expect a
kneejerk rally but over the next month or so the
recent lows look vulnerable.
W: Very erratic chart. We’re
standing aside until a discernable pattern
emerges.
LH: A bullseye call from 6-16
Outlook: “…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….” Indeed, hogs plunged from 65.80
to under 57 basis Aug over the 6 weeks following
our report. Now at 5870, we expect a counter-trend
rally here. Note rising IV, confirming the highs
are likely in with the June top.
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