Dr Joe Duartes Money IQ November 22/04
by Dr Joe Duarte
November 22/04
The pre-market stock index futures were lower on 11-22. The U.S. Dollar
was weaker. Asian markets closed lower. European markets were lower. U.S.
Treasury bond yields were higher. The U.S. Ten Year note was trading with
a yield of 4.19 % in electronic trading. Crude oil was trading higher
but still below $49. Gold was near $447.
The economic calendar for November 22: : No major economic reports
scheduled. Source: Wall Street Journal.com.
Stage Setters
Washington Post: "U.S. commanders may need more forces for operations
designed to press the offensive against enemy fighters." The Post adds
that a change in U.S. tactics, the aggressive pursuit of insurgents into
hiding places will require greater numbers of troops. "Convinced that
the recent battle for Fallujah has significantly weakened insurgent ranks,
commanders here have devised plans to press the offensive into neighborhoods
where rebels have either taken refuge after fleeing Fallujah or were already
deeply entrenched."
Arafat
A growing chorus of international speculation has settled on AIDS as a
possible cause of death for Yasser Arafat.
Separately, German Business magazine Format has reported that Arafat ran
a $1.9 billion network of businesses, including offshore based hedge funds,
and Israeli casinos. According to AFP: "Quoting a Central Intelligence
Agency (CIA) report, the magazine says that the CIA conducted enquiries
after receiving information that a holding company of the Palestinian
Liberation Organisation (PLO) had invested $11.4 million in a small pharmaceutical
company in the Canadian town of Belleville, Ontario.Format says investigators
["stepped on an anthill"] when they uncovered the stake held by the Palestinian
Commercial Service Corporation (PCSC) in Bioniche Life Sciences."
Kofi Annan
Kofi Annan is reportedly slated for a "No Confidence" vote. According
to AFP: "UN staff are expected to make an unprecedented vote of no confidence
in Secretary-General Kofi Annan, union sources say, after a series of
scandals tainted his term in charge of the world body. The UN staff union,
in what officials said was the first vote of its kind in the almost 60-year
history of the United Nations, was set to approve a resolution withdrawing
support for Annan and senior UN management."
Officially, there was no mention of the U.N. Food For Oil program in the
reasons given for the upcoming vote, and no mention of what will result
from it, if indeed it does occur. AFP reported: "Staffers said the trigger
for the no-confidence measure was an announcement this week that Annan
had pardoned the UN's top oversight official, who was facing allegations
of favouritism and sexual harassment. The union had requested a formal
probe into the official, Dileep Nair, after employees accused him of harassing
staff and violating UN rules on the hiring and promotion of workers."
But, there is apparently an increasing amount of pressure on Annan. "Staffers
who asked not to be named, afraid that speaking out could damage their
future in the United Nations, said the Nair decision was an example of
corruption by Annan and his senior staff. (Annan) faces unprecedented
calls to resign over the burgeoning scandal about ["oil-for-food."] "
The New Cold War Part 2
The U.S. unintentionally stepped into a trap when it invaded Iraq. The
trap was set by Saddam Hussein, the Iranian government, the lack of vision
beyond their own interests by global and regional leaders, and had its
origin in the ages old feud between different factions of Islam. None
of these groups were working in any sort of coordinated effort. The only
loosely shared agreement was hatred and or fear of the United States and
Israel. The worst part of it is that Al-Qaeda was indirectctly spawned
by President Jimmy Carter, and the Saudi intelligence service in response
to the Russian invasion of Afghanistan.
What few fail to grasp, is that after 9/11, and a tepid victory at best
in Afghanistan, the U.S. had no choice, took a chance, and did the only
thing that it could, if it was going to do anything decisive, which was
invade Iraq. But, the decision was less than ideally thought out, more
from a timing and manpower standpoint, due to a failure of intelligence,
and internal squabbling in the Bush cabinet. If is also apparent that
no one with any significant access to President Bush, in the CIA, the
National Security Council, the Defense Department, or the White House
had any idea of what was waiting inside Iraq, or the rationale for what
was likely to happen.
Each individual group involved, Saddam Hussein, the Iranians, the Saudis,
and all other parties in the region, including France, Syria, Russia,
and the United States, had only its own interest in mind. None of them
looked at the big picture. Not many in the analytical community, or the
press, specialized or mainstream has fully grasped, or least stated what
is going on, why it happened, and what the possibility for the future
is.
After culling, researching, and exploring multiple sources for years,
and producing numerous columns on the subject, this is our conclusion.
Below, we provide further evidence that clears up multiple gaps in what
is already known, and provides a rather bleak, but realistic roadmap of
what's to come.
For investors, our primary audience, the long term repercussions warrant
extreme amounts of caution and discipline.
Saddam's Trojan Horse
Saddam Hussein set up a Trojan horse in Iraq. According to reports, citing
captured Fallujah prisoners, Saddam set up the resistance as early as
2001. And although it has not been said, it is plausible that, since some
of the money gained by Saddam through the U.N. food for oil program was
used to finance Palestinian suicide bombers, the insurgents fighting the
U.S. in Iraq today, might have also been at least partially funded by
the fuel for oil program, raising a potential link between the controversial
program, the U.N., and the war in Iraq.
According to the World Tribune, citing a report from Middle East Newsline:
"Insurgents captured in Fallujah have told Iraqi military interrogators
that most of those fighting in Fallujah were former security officers
for the regime of Saddam Hussein. The insurgents said Saddam organized
special operations units, starting in 2001, to counter any foreign invasion
in Iraq. Most of those units, the insurgents said, are still active in
the Sunni Triangle. Officials said the Sunni insurgency was being directed
from Syria. They said Saddam loyalists were receiving funding and orders
from senior aides of the former Saddam regime based in Damascus, including
ex-Vice President Izzet Ibrahim Al Douri."
The evolving tactic is one of attacking Iraqi police and security forces,
in an offensive "meant to intimidate security forces and seize weapons
and material."
Iran's Central And Historical Role
In a comprehensive summary titled: "The new geopolitics of the Persian
Gulf: What the 2nd Bush administration should dIran," By Assad Homayoun
offered an important historical summary of the current situation in the
Middle East and how it got to be the way it is today.
The current fighting in Iraq, is a direct result of the United States
retaliating against Al-Qaeda for 9/11. As we have documented here, based
on George Friedman's book: "America's Secret War," the White House knew
that invading Iraq was not the best solution to 9/11, but that it was
the best of a series of bad options. Thus, it took the chance and now
finds itself in the middle of a guerilla war.
But, a look back in time shows how many things came about. According to
Homayoun: "The revolution in Iran, the fall of the Shah in 1979, and the
coming to power of fundamentalist clerics that year introduced massive,
destabilizing changes to the region (of the Middle East) as well as to
international politics. In November 1979, Islamist militants raided the
U.S. Embassy in Tehran, took diplomats and the embassy staff as hostages.
It was the first fundamentalist challenge and a serious test of resolve
of the United States Government. It was a challenge which the then-Carter
Administration in the U.S. failed to meet. Due to the weakness of U.S.
President Jimmy Carter, government-sponsored international terrorism started
its advance towards a new kind of war."
Even in 1979, the language used by bin Laden and his cohorts was apparent.
"Ayatollah Ruhollah Khomeini, the leader of Shi'a fundamentalism, in January
1980, in a speech to 120 Pakistani Army officers visiting him in the Iranian
city of Qom, said: ["We are at war against infidels. Take this message
with you. I ask all Islamic nations and all Muslims, all Muslim armies
and all Islamic states must join us for holy war; jihad must triumph."]
Indeed, this was a true moment frozen in time, from which many things
have evolved. "For the first time in the region, a government openly supported
jihad, promoted and sponsored international terrorism, and transformed
the region into turmoil and posed a threat to moderate regional governments,
and to U.S. interests in the Persian Gulf."
As a result of Khomeini's newly found strength, and capacity to motivate
radicalism, "Saudi Arabia, to prevent Iranian-style revolution and to
compete with the Shi'a Islamic Administration in Tehran, began to promote
its own Sunni-Wahhabi version of Islamic fundamentalism. Competition between
the two branches of Islam - Shi'ism and Sunnism - and financial, logistical,
and ideological support for the promotion of their causes, has been main
reason for much of the present unrest, even though the Iranian clerics
and the extreme Wahhabists cooperate closely on matters regarding common
enemies, such as the United States and the West in general."
According to Homayoun "Between them, (and ironically, according to George
Friedman, with the aid of the U.S., in an initiative spawned by President
Jimmy Carter, see below) they created new warriors with no fixed address,
who devised and undertook wars - using classic and new forms of asymmetrical
doctrines in both the psychological warfare arena (including terrorism),
and in guerilla warfare - ostensibly on behalf of no state, but against
Russia, the West in general, and the U.S. and Israel in particular. Their
steady escalation of capabilities, cohesion, willpower, doctrine and capabilities
- honed by fighting in Afghanistan, Chechnya, the Philippines and, particularly,
the former Yugoslavia - led to increasingly direct confrontation with
the U.S., and ultimately to the pivotal events of September 11, 2001."
As usual, history shows that more than one side has interests in the same
thing. In 1979, the other key development in the creation of fundamental
based terrorism took place. "The Soviet Union, to prevent fundamentalist
contamination of the Central Asian and Caucasian regions, and also to
benefit from the vacuum and gain influence in the Persian Gulf, invaded
Afghanistan in 1979. The United States and Saudi Arabia, to keep the Soviet
Red Army from the Persian Gulf, helped Afghani-based mujahedin with money
and arms to fight the Red Army in Afghanistan. This created a sense of
mission and identity among many Muslim youth (not just the Afghanis),
and, coupled with the U.S. military presence in Saudi Arabia (created
to counter the essentially-secularist military expansion of Iraqi President
Saddam Hussein), led to creation of the terrorist and political momentum
of Osama Bin Laden and the al-Qaeda network of terrorist groups which
pledge allegiance to him."
And as history clearly shows, the situation became self-perpetuating,
as the West basked in the fall of the Berlin Wall, the Dot.com craze,
the highly disputed 2000 election, and the increasingly partisan political
climate, as "Financial support for building of tens of thousands of Iran-oriented
Shi'a and Wahhabist Sunni mosques throughout South Asia, Central Asia,
Bosnia-Herzegovina and elsewhere in the Balkans, in Western Europe, Australia,
Africa, the U.S. and elsewhere; the printing and distributing religious
literature and organizing religious schools; and the targeted use of television:
all this helped to indoctrinate millions of Muslim youths and ["remade
them"] and equipped them for terrorism and suicide bombings. This surge,
now substantially self-financing, and increasingly seeking strategic weapons
to support, defend and project their momentum, is the main reason that
the world has, in recent years, been catapulted to the verge of a new
Dark Age."
The war between Iran and Iraq, and the Iraqi invasion of Kuwait, led to
the inflammation of the already festering situation to a new level of
instability, which culminated in the situation of today.
Homayoun summarizes the situation eloquently: "In looking at all of the
events now challenging the region, it is clear that the catalyst was the
revolution which began in 1978-79 in Iran, and the transfer of control
of that strategic country to the hands of radical clerics. The clerics
started to use Iran as a springboard to advance their revolutionary designs,
and historic events took place one after another, and are still continuing
to happen. It is almost certain that, but for the involvement of Iran,
the ongoing Iran-Iraq competition, and the ongoing Iran-Saudi Arabia (Shi'a-Sunni)
competition, the Palestinian question would have resolved into a viable
modus vivendi before this."
The CIA's House Cleaning: The Center Of The Controversy
The House Cleaning In Langley is gathering steam and creating quite a
stir in Washington. And as the situation boils over, according to Stratfor.com's
George Friedman: "The Bush administration gave the CIA a pass over Sept.
11; they are not giving it a pass over Iraq."
The Bush administration, by assigning Porter Goss as the new CIA Chief
has once again stepped into a status quo situtaion that has been in place
for decades. As a result, much has already been stirred up, and much more
will as well.
The CIA's somewhat erratic performance is not a new issue. But it is an
issue that is now increasingly important, as the U.S. begins to ramp up
the war in Iraq, and begins to sketch out and implement the next several
moves in the war on terrorism, which is in our opinion, the next Cold
War.
According to an analysis by George Friedman, at Stratfor.com: The question
of CIA effectiveness is a fundamental issue that has been on the national
agenda since the agency was founded. This is merely the latest edition
of arguments that raged in every administration -- from the Bay of Pigs
to Rwanda. Who screwed up and when did they do it is an issue that has
raged from the beginning.
But, the major weakness within the CIA, is that, the agency can't seem
to think outside the box. As Friedman puts it: "An event that breaks the
paradigm of an era and that cannot be covertly sourced is what the CIA
is worse at. Broad historical events that are visible to everyone, but
which requires an ability to intuit the deep trend, is something the CIA
simply doesn't do very well. When that broad historical event violates
all conventional expectations, the CIA is fairly helpless."
Friedman lists five key failures to detect major turning points in history
by the CIA: "1. It failed to predict the North Korean invasion of South
Korea or the Chinese intervention. 2. It failed to forecast or clearly
understand the Sino-Soviet split. 3. It failed to understand the nature
of the Cuban revolution until after Castro was in power. 4. It did not
know that the Soviets had tactical nuclear weapons in Cuba and were prepared
to use them in the event of an American invasion. 5. It failed to understand
the probable course of the Vietnam War. 6. It failed to predict the collapse
of the Soviet Union."
Friedman summarizes the reason for the CIA's failures as instances that
share a common thread: "They violate the conventional expectations of
the time. Arguing that the Soviets and Chinese were enemies, or that the
Soviet Union was going to collapse, went against the received wisdom of
the time. All of these did. The CIA has difficulty imagining major historical
discontinuities."
Indeed, Friedman notes that the CIA's major weakness is that it has difficulties
with carrying out covert actions against non nation states, such as "Castro,
prior to the Cuban revolution or more important," or as history has clearly
shows, al-Qaeda, and the Iraqi resistance set up by Saddam Hussein.
All Were Caught Off Guard
According to Friedman: "Al Qaeda was the classic failure for the CIA.
Al Qaeda was not a national government but a small, apparently eccentric,
collection of Islamists. This was already outside of the CIA's sweet spot.
The Sept. 11 attacks were completely outside the paradigm that the CIA
-- and others, including Stratfor -- was working with. The model of terrorism
they had studied for a generation did not include an attack of this order.
Therefore, since the CIA was dealing with a non-state group and with a
historical discontinuity, the agency continued its record for getting
it wrong." More important, though, according to Friedman, is that "the
CIA has is that it also failed in what was supposed to be its sweet spot
-- covert gathering of intelligence from senior state officials in Iraq
concerning a war that had been going on, in effect, since 1990. There
were no surprises here, no discontinuities, no funky, off-the-wall groups.
This was mainline intelligence-gathering."
This is where the report listed above from Middle East Newsline, about
Saddam setting up the Sunni Triangle resistance since 2001 becomes even
more glaring.
Indeed, here is where it all went wrong, and where the "CIA made the core
mistakes," according to Friedman: "1. It did not tell either Presidents
Bill Clinton or George W. Bush that Iraq had no weapons of mass destruction.
It told both of them that it did. 2. It did not understand Saddam Hussein's
war plan and did not warn Bush that the fall of Baghdad would trigger
an organized guerrilla war. Warning of unrest is absolutely not the same
as warning of a war plan. 3. It did not provide clear intelligence on
the status of the Shia in Iraq and the degree of organization that had
been achieved by Iranian intelligence."
In essence, the crux of Friedman's analysis is: "The failure to predict
the Sept. 11 attacks was ultimately a systematic failure hardwired into
the CIA. The ways in which it collects intelligence and the way its analytic
process works have consistently generated failures on this level. When
an institution fails to do a certain type of work well for 50 years, it
is hardly fair to condemn it when it repeats the failure. The failures
it can be condemned for, however, are the mainstream collection and analytic
failures that shaped the Iraq campaign."
The divisions run deep between the White House and its allies and the
CIA. As conservative columnist Bob Novak reported on November 18, Senator
John McCain told (new CIA boss) Porter Goss "the CIA is [''a dysfunctional
organization. It has to be cleaned out.''] That is, the CIA does not perform
its missions. McCain told Goss that as director, he must get rid of the
old boys and bring in a new team at Langley. Moreover, McCain told me
this week, [''with CIA leaks intended to harm the re-election campaign
of the president of the United States, it is not only dysfunctional but
a rogue organization.'']
Conclusion
The Bush administration has begun the work of reversing a pattern of corruption
and deception of the last 50 years. Much of it has centered in the Middle
East, and has involved for many reasons, both financial and ideological,
key governments, agents, and wannabe legitimate governments and or their
representatives, as well as international agencies.
The U.N., like it or not, seems to have acted as a conduit, a clearing
house, or at least a place where parties could meet to discuss business.
The Middle East, with its rich oil resources, its mostly autocratic governments,
and religious culture provided a fertile environment in which to perpetrate
all kinds of illicit and covert businesses that at least temporarily enriched
a handful of individuals while simultaneously pitting the masses against
each other, anddirecting their hatred toward Israel and The United States.
The U.S. government was clearly glad to overtly and covertly do what it
could to keep the status quo in the Middle East, so long as the oil flowed,
and the difficulties remained constrained to the Middle East.
But 9/11 changed all that. Al-Qaeda opened Pandora's Box when it attacked
the Twin Towers.
The fall of Saddam Hussein, and now the death of Yasser Arafat have allowed
the leakage and reporting of significant amounts of information that clearly
points to large amounts of corruption and financial alchemy, laying bare
the essence of what goes on inside dictatorships and revolutionary movements.
And just as the CIA failed in its mission, by not thinking outside the
box, bin Laden, and the Middle East governments also miscalculated. Used
to fairly temperate American responses, aside from the first Gulf War,
the Middle East thought that the U.S. response to 9/11 would be limited
in scope and that business as usual would return soon enough. In fact,
history has shown that to be different.
To be sure, invading Iraq has not solved the problem, and has created
a whole new set of difficulties, creating a war in which is not going
to stop anytime soon, and which could easily spread to other areas of
the Middle East and indeed the world.
France, Russia, North Korea, Syria, Iran, and all who opposed the war
in Iraq, are quite perplexed, and scrambling as to what to do next. This
of course means that resistance, and even offensive action, overt and
covert, from these and other players cannot be ruled out, and is likely
at some point, when things begin to get more sticky, and more data on
how high the corruption goes is disclosed.
In this conclusion, contrary to what some are likely to read into it,
we are not lionizing the Bush administration. We are merely pointing out
what no one else seems to be grasping, or at least not saying. Bush and
company have crossed the Rubicon. Whether they want to continue or not
is not relevant. They have now gone too far to stop.
By "cleaning out" the CIA, they have stepped on their own "ant hill,"
and there will be consequences. By invading Iraq and not folding, despite
the lack of a definitive success, as of yet, they have become involved
in a situation from which there is no easy exit. And by not shutting down,
and likely backing the investigation into the "Food for Oil" program at
the U.N., they are going to unleash a torrent of significant revelations
that are likely to end the careers of some major international players.
Over the next four years, and perhaps beyond, the daily grind of war will
be upon us all. The mess that has been uncovered in the Middle East, and
that which remains to be uncovered will dwarf the most insidious scandals
in history. And the misery and unhappiness that will come from this war
will easily match or perhaps exceed that of any other major conflict in
history.
This is indeed the New Cold War.
Oil Markets : Futures Follow Through In Overnight Trading
Crude oil futures look ready to challenge the key technical resistance
of the $49 area and the 50 day moving average on Monday trading, if the
overnight futures prices hold. On Friday, 11-19, as we predicted, we got
a rally, which broke the three week lower low Friday closing streak. This
is a clear short term trend reversal that has the potential to move prices
higher, and bring about a test of the $55 highs.
Selected oil service and integrated oil stocks delivered chart break outs,
confirming a return of strength to the sector.
The key level to watch is the $48-$49 area and the 50 day moving average.
These former support levels are now resistance. A convincing set of closes
above this key area in the next few days would signal that the up trend
is back in business.
The Philadelphia Oil Service Index
(OSX) held above 116, a key pivot point, and closed above the 120 area
on 11-19. For more details on trading the energy sector visit our energy
timing page, featuring our highly effective OIH timing model and our Top
Ten Energy Stock List.
The Amex Oil Index (XOI) has consistently
remained above the 700 area, and remained above its 50 day moving average,
key pivot points. Support is at 686. Resistance is at 725-730. For immediate
analysis, including stock picks, and the latest in technical analysis
of the entire energy complex, our subscriber section has a full complement
of recommendations in oil service and the rest of the energy complex.
In the current market, we recommend a copy of "Successful
Energy Sector Investing" (Random
House/Prima Venture) .
The book predicted many of the current developments in the economy and
the energy markets, and provides an excellent set of benchmarks and trading
lessons for what could be in store for the future.
Technical Summary:
Momentum Temporarily Stalls
Stocks hit the wall on Friday, and may follow through to the down side
on Monday. Two important things should be watched for. First, can the
market turn around mid day on Monday. And two, can it follow through to
the up side for the traditionally bullish Thanksgivings week.
The potential for at least a temporary rebound in oil prices seems to
have once again become a factor, and will continue to weigh on the markets,
along with the suddenly popular fall in the U.S. Dollar.
The market has all the hallmarks of being in the midst of a fairly good
momentum run. But, if Friday's stall gets a foothold, the rally might
be over, at least in the short term. Momentum runs are always great fun
when they are in full force. But, as we have said many times in this space,
they never end well. And worst of all, when they finish, they are almost
always followed by a protracted decline. How long this one lasts is as
usual up for grabs. But, when it ends, sooner or later, we'll all know
it. Indeed, the merger action suggests that things are about to heat up
even further.
The only thing to do in a momentum run is to be in stocks, stick with
the trend, and to ratchet up sales stops as the market rises.
All the major indexes remain above their 200 day moving averages. The
NYSE advance decline line is still in excellent shape. The number of stocks
making new highs is expanding.
Small stocks and the Value Line Index have made all time highs recently
, and the S & P 500 has broken out.
Key sector indexes have also broken out, including the Philadelphia Semiconductor
Index (SOX), the Amex Computer Index (XCI), and the Philadelphia Bank
Index (BKX).
What To Do Now
No change here. Let the market make the decision. Hold open positions
while limiting risks to no more than 5-10% to the down side. When the
market rallies and a stock fails to hold its own, be prepared to sell
it.
Check all our sections daily. See tech, biotech, Fallen Angels, and
timing systems for the latest adjustments. The biotech list is featuring
many newly minted trades. Niche energy stocks are showing strength.
If there is any buying, the focus should be on strength, either in break
outs or turn around situations, as featured on our Fallen Angels portfolios.
MASI Remains Negative
Our proprietary options market based MASI indicator delivered its third
consecutive sell signal on 11-19, after the close. MASI gave a sell signal
on 11-5-04 and repeated it on 11-12.
The CBOE Put/Call checked in at 0.81 on 11-19, after the cautionary 0.56
on 11.15. This indicator is still weak and will require several readings
above 1.0 to make it bullish again. The indicator read 1.07 on 10-14 for
the second consecutive day, after the 1.01 reading on 10-8 and the 1.00
on 10-12. This is still a good string of bullish readings. But the market
is ignoring the wall of worry. Recent bullish readings have been 1.10
on 9-22, 1.05 on 9-8 and 1.03 on 9-3. This has been a good run of pessimism
as the market has stopped falling, as it followed a fairly good reading
of 0.92 on 9-2, and a bullish reading of 1.05 on 9-1. Other good readings
preceded the recent bottom, such as the 1.03 on 8-10, and the bullish
1.38 on 8-6 which finally eclipsed the readings of 1.12 on 7-16, and 1.17
on 7-12. We like to see investors turn bearish when the market starts
falling, and we also like to see them remain cautious as markets rally.
A consistent string of low readings can be a sign of excessi ve optimism
and often signals a top in the markets. Readings below 0.5 are of concern,
but not as serious as readings below 0.40. Readings above 1.0 are bullish.
The numbers cited here are meant to be evaluated on a closing basis.
The CBOE P/C ratio for indexes on 11-19 was 2.53, a bullish reading, which
followed several weak readings, 1.08 on 11-8 and 1.02 on 11-17. Recent
bullish readings were increasingly distant than the 1.95 on 10-5, and
the 1.83, on 10-4. The 9-29 reading of 2.32 was very bullish, and launched
a nice end of month rally. The ratio was 1.81 on 9-27, and correctly predicted
a bounce. The 9-20 reading was 2.42, as high a reading as we've see of
late. Recent bullish readings have 1.97 on 9-15, 2.24 on 9-10, and the
9-8 reading of 2.29. The reading of 9-1 was 2.20, a bullish reading, exceeding
the 7-16 reading of 1.92, and the 7-12 reading which was 1.96. Readings
below 0.9 suggest too much bullish sentiment, just as readings above 2
are usually required to mark major bottoms.
The VIX and VXN had readings of 13.50 and 19.72 on 11-19. Recently we
had a VIX close below 13 is new, suggesting rising complacency in the
market. When these indexes begin to rise, it is a sign of concern as rising
volatility indexes suggest that an acceleration of the prevalent trend
is on its way. In this case the implication is that the down trend is
going to assert itself. This series correctly predicted that a trend change
was on its way. If the volatility indexes begin to rise, it usually means
that the market trend is about to change, usually to the down side. A
fall near or below 20 on VIX and 30-40 on VXN is considered negative,
a fact that is usually confirmed when the volatility indexes begin to
rise. Readings above 40 and 50, respectively, are often signs that a bottom
may be close to developing.
Newsletter writers remained happy last week. For the week ending 11-19-04,
the ratio of Bulls/ Bulls + Bears of Investor's Intelligence's weekly
sentiment figures remained above 70%. The 13 week moving average of the
series remained below 70%, which is usually a sign that the market could
make a top. Major rallies have traditionally been launched usually when
this indicator falls below 40%.
The futures traders polled by Market Vane gave a sell signal on 11-12,
with a 70% reading and repeated it on 11-19. This survey delivered a sell
signal on 2-20, with a reading of 70% bulls on stocks, which preceded
a significant market decline.
Our Big Trend Model fell to 57.5 on 11-19-04 for the second week in a
row. This, until proven otherwise is a bullish reading. Readings near
or below 40% often precede market bounces, but may initially be signs
of caution when markets have had a rally. Readings above 80% are usually
bearish. The Big Trend Model is composed of technical and monetary indicators
and updates automatically on a weekly basis.
Our MASI indicator gave a sell signal on 11-5 and repeated it on 11-12.
The indicator gave an accurate sell signal on 10-8. MAGI is still on a
buy signal, after it correctly gave a sell signal on 7-2, its first after
gave a buy signal on 4-9. When these two indicators agree, the market
usually follows in the direction of the signals. MAGI is based on the
weekly data provided by Investor's Intelligence's poll of newsletter writers,
a group that has been bullish for several years, and stayed bullish, and
wrong throughout the bear market. When both indicators agree, there is
a high degree of correlation with a significant market move. When these
indicators disagree, it is often a sign that the market is about to go
nowhere but that volatility is on the verge of increasing. MASI buy signals
when MAGI is bearish are rarely worth acting on. MAGI is an intermediate
term indicator with an excellent predictive record. The best market bottoms
occur when both of these indicators are both on buy signal s, a telling
sign of intense fear on the part of investors. MASI and MAGI are sentiment
indicators that are updated on a weekly basis.
The NYSE insiders were buyers of stock on 10-29, for the second week running.
. This set of indicators is still overall bullish. We would become very
concerned to see increasing levels of short selling by the specialists,
which is still not evident . We will be watching this indicator carefully
over the next few weeks, for that development. This indicator is very
positive when short selling by the specialists is low as the same time
that they are net buyers of stock. This is a set of very smart investors,
and when they turn positive or negative, it is just a matter of time before
the market follows. Spec data is released to the public with a two week
lag, so is not useful as a market timing tool, but is excellent background
and confirmatory information.
Market Moves
Broker Stocks Showed No Relative Strength On November 19.
The market ran into some fairly stout selling on Friday, and few groups
showed any relative strength.
Among the beaten up were the brokerage stocks.
Both Goldman Sachs (NYSE: GS) and Knight Trading (NNM: NITE), our sector
bellwethers gave into the selling pressure.
Goldman Sachs is an excellent predictor of higher stock prices, and more
importantly, of mergers and acquisitions.
When traders bid this stock up, it usually means that information about
deals is starting to run high among the insider crowd.
Most recently, the Sears K-Mart deal happened after a nice run in Goldman.
But, the fact that the stock rolled over on Friday, makes us wonder if
the deal craze may have run its course.
Knight Trading is an excellent predictor of future prices on the Nasdaq.
This key market maker usually rallies as traders expect rising volumes,
and usually the higher prices that follow.
On Friday, as the market sold off, Knight pulled back along with it.
The 11 area is key support, as is the 200 day moving average near 10.50.
Breaks below these two support areas, could mean that the rally is over,
or will be over in the future, not too far away, given Knight's good predictive
record.
Conclusion
The Amex Pharmaceuticals Index (DRG) closed above the 300 area but was
very weak on 11-19. For a full description of the ins and outs of investing
in biotech and pharmaceutical stocks check out our book "Successful
Biotech Investing", available
at amazon.com, barnesandnoble.com, and bookstores everywhere.
The Philadelphia Semiconductor Index (SOX) closed below its 200 day moving
average on 11-19. A break below 410-420would be very negative. For trading
info on technology stocks visit our Stock of the Day and Technology timing
sections.
Small stocks held their own, but no new highs were delivered, and they
sold off with the market. The S & P Small Cap 600 has made several all
time highs lately. And now, the Russell 2000 also made an all time high
recently. For trading suggestions in the small cap arena visit our S &
P trading page featuring our ETF trading model for small caps.
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Disclaimer: The financial markets are risky. Investing is risky. Past
performance does not guarantee future performance. The foregoing has been
prepared solely for informational purposes and is not a solicitation,
or an offer to buy or sell any security. Opinions are based on historical
research and data believed reliable, but there is no guarantee that future
results will be profitable.