FSU Editorial: "Cautiously Optimistic" by James West 06/27/2006

CAUTIOUSLY OPTIMISTIC
by James West
forever a student of the markets
June 27, 2006

Broad Markets

Last week I wrote that commercial net- position in the S&P 500 index perked-up 60 000 contracts, which �could mark a bottom in the stock market for the near future�. However, I tried to remain cautious because commercial activity in all other indexes was little changed and did not confirm what I was seeing in the S&P 500. Since then, however, commercial net-long positions also perked-up in the Nasdaq-100 and Russell 2000.

Russell 2000: http://buythebottom.com/russell.html

NASDAQ 100: http://buythebottom.com/nas100.html

So why am I only cautiously optimistic? Well, because commercial net-position in the Dow Jones index � on the other hand � actually decreased by roughly 15 000 contracts.

Dow Jones: http://buythebottom.com/dow.html

In a nutshell, I am more constructive on the markets in the short-term. I will be looking forward to next week�s COT data to see if all commercials finally align on the markets: one way or the other.

HOWEVER: (And this is a big however)

I am still bearish on the stock market in the intermediate to longer-term. On May 14, 2006, I warned investors that commercials were getting out of the stock-market and that the market was setup to decline. Since the May peak the markets are down in the range of 10%. (Russell 2000 is down 14%). The point that I am trying to make is that we are probably seeing a bear market correction, and not the start of a new bull market. Recent commercial buying only occurred after an extended decline in the markets, this probably means that if the market were to put in a rally, commercials would use that opportunity to sell out.

This is actually very reminiscent of the 1987 crash. Back then the markets also rallied to new highs before they crashed. Unfortunately I cannot see into the future, so I do not know whether the markets will crash or not. What I do know, however, is that the smart money knows a little bit more than I do. So I will continue to follow their lead, which currently leaves me short-term bullish and longer-term bearish.

And I will change my opinion on the market, as soon as the commercials change theirs.

Gold - http://buythebottom.com/gold.html

The gold market is setup for the much awaited summer rally. There is a fair chance that gold will consolidate further before it rallies, and a small chance that we will re-test June�s reaction lows. Thus far commercials are bullish on gold, virtually everybody else is bearish, and hence, I see any weakness in the metal as a buying opportunity.

Oil - http://buythebottom.com/oil.html

Crude oil is almost there. Commercials net-position is increasing, while large traders are sellers of this market. I think one or two more weeks of range-bound trading for oil, and this market will finally be ready for a summer rally. In the past I wrote that I expect oil to retest its 200 day moving average at around $65. With every passing day that oil stays up in the $70 range and commercials are buying it up, the chances of a 200 day moving average re-test decrease. In fact, as of right now, I would have to say that we will probably not see oil go much below $68.

If, however, oil was to reach its 200 day moving average at $65, that would be a gift in terms of a low-risk, high-reward ratio trade.

Updated weekly COT charts can be found @ www.buythebottom.com

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Contact Information
James West
www.buythebottom.com
Toronto, Ontario, Canada
Email: westjam @ gmail.com (Remove the space before and after @ when sending your email)