Stock Market Choke Points: Part 6

by Brian Stoll, TimingStrategies.com. July 2, 2008

From our last report on June 20 our market map/layout for buy and sell points were undergoing modification due to changes in price structure divergence of the Dow/S&P vs. the NDX/R2K. At this point I’d like to make a personal opinion comment on what I keep hearing from the financial media about their recent mislabeling of the price of crude oil and gasoline as a “commodity bubble” and bubble in oil. My comment: How !%*#%*!... ridicules, ignorant and foolish the majority of media blather that oil is a bubble sounds to me for countless reasons, but let me posture just a few easy ones. 1.) Oil is a finite and precious resource that cannot be electronically printed in unlimited quantity from thin air like government or corporate paper.2.) It cannot be grown like crops albeit, food and clean water being the more precious of the two resources vs. oil/energy, food can usually be increased in production with a little time. 3.) Oil is not recyclable like metals or plastics. 4.) Tech stocks and Real Estate building/financing were bubbles due to their unlimited saturation as evidenced by the Wall Street greed merchants. The financial media’s attempt to “scare talk down” oil prices by everyday calling it a bubble is only adding fuel to higher prices if anything.

Oil has historically traded in a price band or range for 10-20 years at a time. That range was either greatly influenced by the major western oil companies in the first half of the century, up to the mid to late sixties until OPEC gained greater power in the early seventies. OPEC’s comfort area for almost 20 years was generally between $15-$30 dollars a barrel depending on several monetary, economic and political factors. That previous price dynamic was destroyed by numerous factors compounded by the amazing brilliance of “W” and “Greenskunk”! Add a little sub-prime, reckless banking and recent Fed. /Tres. sponsored Wall Street bailout welfare and “poof” what do you get…?

This…! A whole new potential range for prices between ~ $50 - $155 in my estimation!

The U.S. cannot support $150 dollar oil for very long, heck it cannot support $100-$120 dollar oil for much longer as it is, but the probabilities that either $140-$150 oil breaks the entire economy or the economy breaks $140-$150 oil, is a pretty safe bet.

My current estimation calls for the top of a new price range for oil between $140-$152.50, which, “appears” to me, to be maxing out right at about the current $142.50 level. The temporary maximum low end over the next 3-6 months “should” be in the $105-$95 area. This is only my limited estimation, and as all things, is subject to change based on outlier events such as war or other.

Now let’s take a look at the stock market. My first of the year estimate for sell/short points for the upcoming year that were labeled “ Kill Zones” for minimum and maximum upside price targets worked out rather well thus far, 142.50 min. – 150.50 max. basis SPY for the S&P. The min. target 142.50 worked almost perfectly and in hindsight, instead of implementing an 80% short position from May 19-June 27, the regret is that we weren’t greedy enough with larger size and longer holding period before scaling out. To quote George Soros: “when your right you can’t be enough of a pig”, but that’s not how we managed risk, so all things in balance. Due to the fact that only the min. “Kill Zone” target was reached with aggressive selling thereafter, this has altered our previous buying execution plans.

At the current price level on the SPY of ~128.40 on Tues 7/1/08 close, the current position for our Rydex EOD system from Fri. 06/27 stands at short 40% NDX & R2K, long 40% DOW & S&P, long Precious Metals 20% and long Banking/Financials 20% using Rydex funds for our long /short accounts. The long only accounts are long 40% DOW & S&P, long Precious Metals 20% and long Banking/Financials 20% without the short component. This gives a relative exposure of being long effectively 80%/40%. Such allocation at this juncture is at best temporal, and I am looking for a 2.5%-7.5% bounce at this time to re-establish flat/short positions as lined out in the below attachment.

Should the current 60%, effectively long biased portfolio structure in our Rydex EOD system be deemed a bit premature, (as only hindsight will reveal) our previous buy level lined out at green B2, a potential straight long position of ~120%, may or may not kick in as planned and we may reverse the entire portfolio structure back to net short due to changing market conditions. To monitor more closely accounting of our positions, check for daily video updates on our client blog.

From my perch, the current market environment is demonstrating price action very similar to that of the March-July 2002 period and I am becoming more convinced of a serious bear market with implications of a mix between 1973-74 and 1929-32 style longer term price action. From that type of operating perspective, instincts become more and more essential in managing execution and risk, due to the fact that a blend of trend following and regression analysis can both be compromised using normal inputs providing 80% of their effective market parameters.

That said, current local daily price extremes and other filters are demonstrating a very strong probability of the 2.5%-7.5% near term reversion that I am looking for and monitoring my own self/market induced sentiment, indicates similar markers. The problem with becoming dogmatic in that estimation with money at risk is the obvious fact that there has not been truly enough of an extreme regarding price and volume in relation to previous historical market outlier extremes. I do not attempt to predict the future or forecast events as it is typically nonsense and managing money and risk precludes such. That said, present market environment is leaning itself more and more to a black swan event or the proverbial 100 year flood that, with the help of Wall Street, seems to occur every 10 or so years. If and I do mean a big “IF”, something like that were to occur, it is my sense that before such an event were to happen, there “should” be some sort of bounce or “pause that refreshes” before a serious resumption in selling continue or any “event”. Happy 4rth. of July to everyone, let us all be grateful for our numerous blessings and recall the principals of truth and freedom that our forefathers gave us, we must protect those values from all enemies foreign and “domestic”! (hint)

This is by no means a recommendation to buy, sell or make any investment whatsoever.
I would also like to clarify the mention from my last client update regarding the E-book by Rick Johnson, its correct title is “Finding Waves” not finding cycles, it is available at Traders Press.

Contact Information

Brian Stoll | TimingStrategies.com | Registered Investment Advisor
Newport, California | Email | Website