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The Iraq Related Scrambling Is Gathering Momentum

And Are The Bulls Running Out Of Time?

by Joe Duarte 

What's Happening

Intel’s earnings report was better than expected, but did not provide the silver bullet statement that the future was bright and that all the bad news was over. Instead, the company continued to be very cautious, and cut its own capital spending plans more aggressively than expected. This threw some cold water on the tech sector in the after hours setting, and it followed into Europe
and Asia.

The pre-market futures were once again flat. Crude oil was rallying, as traders set positions up for a potential surprise in the supply figures from the American Petroleum Institute and the Department of Energy, both to be released at 09:00 on 1-16. Earning reports from Yahoo, Apple Computers, Fannie Mae, Bank of American and Genentech are also likely to influence trading.

Is the market running out of time? It’s possible, and investors should be wary over the next couple of days as the bulls have failed to take the upper hand. Thus, the market only has a few sessions left to make up its mind or risk losing an excellent chance for a momentum run. As we reported on Monday, our indicators suggested that this could be a very powerful week for the bulls as momentum last week was as strong as we have seen in the last 12 months and sentiment is nowhere near signaling that a top is here just yet. Little has changed, except that the market is still waffling. Traditional technical indicators such as the number of stocks making new highs and the advance decline line are still giving very positive readings. When placed in the context of the nice momentum thrust that the market gave us on January 2nd, where NYSE and Nasdaq ratios of up volume to down volume were both over 9 to 1, there is only one conclusion to make barring a very negat! ive external event. The market sho uld be going higher in the short term. Nevertheless, at some point if the market continues to fail in its efforts to break out, it’s only a matter of time before the sellers gain the upper hand.

In case folks missed it, as time is ticking closer to February, the action on all sides of the ledger is getting more aggressive, as global governments are scrambling for any advantage they can garner before the nearly inevitable U.S. invasion of Iraq. reported on 1-14 that its sources have revealed that a top level Iraqui official will be heading to Cairo to attempt to forge some kind of last minute maneuver such as an Arab summit, or some kind of agreement that will allow Saddam to step down and leave a hand picked heir in charge. We suspect that the latter won’t go over well with the U.S. or Britain, although the lesser powers could do their trained seal impressions and applaud at least a little in hopes that war will be averted.

CNN reported on 1-14 that U.S. Air Force pilots will begin to fly U-2 spy planes over
Iraq in order to help the weapons inspectors. The planes will have U.N. colors. Meanwhile, according to the Moscow, Russian oil company Lukoil will be in Baghdad on 1-15 to negotiate itself back into a contract which Iraq reneged on based on the notion that the Russians were being too helpful to the U.S. in the ongoing pre-war effort. One of Russia’s fears is that when the U.S. invades Iraq, its oil companies will lose any influence and resources that they held under the Hussein regime. In a related note, the Washington Post reported that Republican senators will once again be attempting to revive plans to drill in the Alaska wilderness, something we pointed was highly likely in our recent Op Ed piece on CBS Marketwatch and in “Successful Energy Sector Investing.”

The rhetoric is getting increasingly harsh and more countries are lining up on the U.S. side of the ledger. reported on 1-14 that U.S. officials are now inspecting Turkish bases, a likely prelude to some kind of agreement for their use in the war against Iraq. Turkey is a key geographical location, being in the North of Iraq. Chief U.N. weapons inspector Hans Blix was quoted as warning Iraq that it needed to be more cooperative or face war. President Bush on January 14, said he was “sick and tired” of Iraq’s “games,” and warned Hussein of rising chances of trouble. And perhaps the most significant development of the day came from Iran, a charter member of the “Axis of Evil,” when a highly placed National Security official publicly stated that Iran supported Iraq’s disarmament, but not a regime change. This was a big move by
Iran, and once again noted that the continued pressure by the U.S. on Middle Eastern nations is taking its toll, and that slow! ly but surely, they will either abs tain from any opinion against the invasion of Iraq, or in some way support it.

Iran was not alone, as its “Axis of Evil” sibling North Korea looks closer to coming to the negotiating table albeit kicking and screaming. On 1-14, we wrote: “We expect North Korea to continue to bluster and bang its head while the U.S. continues to use weasel words to get them to the negotiating table. “ Not a bad little sentence, given that the Chinese are now likely to slowly move the two sides to the table and some kind of deal should be worked out. This is another example of a rogue country whose leader is totally insane finally caving in to the reality that they could be next. Strange times we live in.

Technical Summary


Chart Courtesy of

The S & P 500 is on the verge of a break out, or a failure. The index is increasingly close to its 200 day moving average which is near 950, but is not showing signs of being in a hurry to get there. Support is still at the 900-912 area for the short term. A break below 900 would reverse any intermediate term up trend. Key long term support remains at 768-775, the July 23, 2002 and October 2002 lows. Nasdaq is above its 200 day moving average, with the next resistance being 1500 in the short term. The small stocks are likely to move along with the general trend of the market, but have gone nowhere of late.





Stock Of The Day


Chart Courtesy of

The stock is of the day is Applied Materials (NNM:AMAT). AMAT is the world's largest chip equipment manufacturer and its action will be crucial in determining what many tech stocks do in the next few days and weeks. The stock failed to break above 16 on 1-14, as investors pulled away as they waited for Intel's earnings. The cut in capital spending by Intel hit the chip equipment stocks in after hours trading and extended into
Europe. What investors should watch for is what happens in AMAT and others Like KLAC and TER as the trading day continues. If they can either open well or have a good intraday turn around, we would expect other tech stocks to follow.



Chart Courtesy of

Sentiment, Asset Allocation, and Background Indicator Summary

The CBOE Put/Call ratio was 0.70 on 1-14, again a neutral number, and not one suggesting major danger. If the P/C ratio drops rapidly as the market rallies it is usually a signal that the rally is reaching its end. Readings below 0.5 are of concern, but not as serious as readings below 0.40. Readings above 1.0 are bullish. The most recent reading above 1 came on 11-8.

The CBOE P/C ratio for indexes was 1.23 on 1-14 , showing some improvement. 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 26.55 and 41.92 respectively on 1-14. These indexes continue to drift lower suggesting that complacency is rising. A fall below 20 on VIX and 40 on VXN would be very negative, especially if the market rallies. Readings above 40 and 50 are often signs that a bottom may be close to developing.

Newsletter writers have remained bullish, but again turned less bullish on January 10. Unfortunately, this influential group is still too bullish overall which means that the odds of a rally lasting for an extended period is not very large. This group has been very wrong since the top in the year 2000. They finally turned bearish at the October bottom and were once again wrong as the market rallied. That means that their persistent bullishness is now something to keep an eye on. In contrast to the newsletter writers, the futures traders polled by Market Vane have stayed bearish throughout the bear market, and they turned more bearish.

Our asset allocation model moved up significantly on 1-10, and now suggests a 65% exposure to stocks. We suggest caution when implementing any increase in risk to this market.

Our MASI and MAGI indicators are now neutral increasing the chances of a short term upward thrust in the market.

The NYSE specialists remained positive in their latest NYSE Members Report. The data is for the week ending on December 27, 2002. 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. For now this remains a positive, but must be monitored on a weekly basis. Spec data is not useful as a market timing tool, but is excellent background information.


Chart Courtesy of

The Value Line Index (VLE) is still playing chicken with its 200 day moving average as it closed right on the line on 1-14. This is an uncomfortable situation in the market. The index has remained above its 20 and 50 day moving averages, and if it can close above the 200 day line, it would be very bullish. If the index could remain above its 200 day moving average close out the week and not falter in the next few days that follow, by definition the long term trend for the broad market will have turned positive. Resistance is also still present at 1100. There is support at 985, the 50 day moving average, and 900 below that. VLE gauges the performance of 1700 stocks, and is not market capitalization weighted. That means that it is a true picture of what is happening to a very broad base of stocks, and not just affected by the movement of one or a few major stocks.


Chart Courtesy of

The Amex Biotech Index (BTK), remained above 360. The index got a nice boost from the FDA decision to turn favorable on Genzyme for its Fabry’s disease drug. The next excuse to move the sector will be earnings, with Genentech due out on Wednesday. Overhead resistance remains at 380-400, even on a rally above 360. The 340 support level is crucial because if BTK breaks below 340 would be an intermediate term set back. A break below 300 could take the index to 275. See our premium Health and Biotech digest for full details and a newly updated list of both long opportunities and short sales for biotech.

Chart Courtesy of

The Amex Pharmaceuticals Index (DRG) went nowhere again on 1-14. The index is still struggling to cross above 312 and its 200 day moving average. This has been tough resistance for the sector, that is suggesting that a great deal of pent up selling pressure is still present in this market as key sectors reach important resistance levels. A sustained close above the key 312 chart point would be very encouraging. The 320 area for DRG remains the key. A move above 320 would be a welcome development, as that would take the index above the 50% retracement point from the recent bottom, and would be a sign of strength. 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 ama!,, and bo okstores everywhere.


Chart Courtesy of

The Philadelphia Semiconductor Index (SOX) will likely head lower, at least in early trading. Intel’s earnings drove down the chip manufacturing stocks in after hours trading. If the index can close above 352 if would signal a reversal of the long term down trend.


Chart Courtesy of

The oil complex is once again going to be driven by news events. Supply statistics will be released on 1-15 at 9:00 A.M. Eastern time and are likely to influence the short term. The XOI and OSX indexes were mixed on 1-14. See our energy section for more details on individual stocks and the latest recommendations on our highly successful energy timing system using the Oil Service HOLDRS Trust (OIH).

The Philadelphia Oil Service Index (OSX) will be testing the support at the 80 level. This remains a sector that it highly tied to news events, and a trading range could be in place for several more months. Many of these events and the effects on the markets were predicted in our latest book "
Successful Energy Sector Investing"
(Random House/Prima Venture) .

Chart Courtesy of

The Amex Oil Index (XOI) will once again be testing the support at the 440 area. A break below here would be negative. A move above 500 for XOI would be a very bullish development for the energy complex. 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.


Chart Courtesy of

Small cap stocks continued to go nowhere. The sector is still being held hostage by the U.S. dollar, which in turn is being pressured by the specter of war against Iraq. The dollar has broken key short term support, as the Yen and the Euro are steadily stronger. The SML has stood still over the last few days and could still move to 210 in the short term, but only if the overall market improves. The index has failed to move through short term resistance several times in the last few weeks, and time is still ticking for the so called January Effect on small stocks.

The dollar is an important influence on small stocks since this macro sector of the market tends to rely on domestic business rather than international money for its earnings. Larger multinational companies tend to benefit from a weaker dollar as it aids exports. But the economic weakness is a drag on the dollar, keeping a lid on small stocks.


Joe Duarte M.D. is the author of Successful Biotech Investing and After Hours Trading Made Easy. His expanded daily market coverage is available to subscribers at



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