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.