Jay Shartsis

Jay Shartsis: Sell Stocks, Buy Gas
by Eric J. Fry
The Rude Awakening
Wall Street, New York
Friday, March 3, 2006

Eric Fry shares the opinions of Jay Shartsis: that a 9% correction in the stock market is due soon, and that natural gas should rally.

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Eric Fry, from the belly of Baltimore, reports...

Your New York editor has just returned from his annual
pilgrimage to Miami's South Beach. For seven consecutive
Februarys he has abandoned the dispiriting arctic chill of
New York for the rejuvenating sunshine and sensations of
South Beach.

Each of those seven years he has convened with a select
cadre of hedge fund managers, short sellers and rogues-
without-portfolio. (Your editor falls into the latter
category). Every year he returns from the meeting with a
suitcase full of informed insights and investment ideas. 
But he also returns from the meeting with a suntan, a
slower pulse and a renewed fondness for all things
Latin...including, but not limited to, mojitos – a
delightful concoction of rum, mint and sugar.

On his final night in South Beach, he ambled into the
Mojito Lounge on Espanola Way and ordered their "classic."
And it was a classic indeed, complete with a sugarcane
stir-stick. Your editor grabbed the top of the cane and
began stirring his drink, just to be sure of lifting the
sugar from the bottom glass.  He took a sip, paused, and
informed his companions, "Yep, they're still as good as
they were last night."

He withdrew the sugar cane from his class and gnawed
indelicately on one end for moment, just to savor its rum-
infused sweetness. It was good. Using sugarcane to stir a
mojito may not be the highest and best use of this sweet,
fibrous plant, but it's not a bad use.

As it happens, the Brazilians have found another worthwhile
use for sugarcane...as a feedstock for ethanol production. 
Other countries and industries around the world are
developing, or trying to develop, bio-fuels from various
other types of organic feedstocks.  Most of these efforts
are not entirely new.  But they have taken on a new urgency
and viability, now that crude oil sells for more than $60
dollars a barrel.

The lofty price of crude has encouraged folks to convert
everything from sugarcane to corn to palm oil to turkey
carcasses into some form of bio-fuel. Here at the
Rude Awakening, we are fascinated by the bio-fuel
phenomenon and have been investigating some of the related
investment opportunities. The more we look, the more we
find. So we expect to be divulging some of our discoveries
and ideas over the coming weeks. But as we do, we'd also
like to poll our readership for their ideas.

So it's time once again for another "Rude Awakening Group
Research Project." Between today and next Friday, we would
ask you to share with us your favorite "alternative energy"
stocks. Although we are primarily keen to hear about bio-
fuel plays, we'd be happy to learn about any alternative
energy company.

However, as always, we are seeking only mid- to large-cap
companies. No small caps, please. So the suggested stock
must have a market capitalization greater than $500
million. And obviously, no inside information, please. We
will examine the submissions that we receive over the few
days and will provide a sampling of the best ideas in
upcoming editions of the Rude Awakening. You can send along
any thoughts to aussiejoel@the-rude-awakening.com Thanks in
advance for your participation.

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Sell Stocks, Buy Gas
By Eric J. Fry

Whenever you chat with Jay Shartsis, you get the feeling
that his mind contains more statistics than the Major
League Baseball database. But Shartsis doesn't track "most
hits by a lefty third-baseman during a three-night series
on the road." He tracks financial market statistics,
especially the sorts of statistics that indicate short-term
trends. At the moment, some of the financial market stats
that Shartis tracks are suggesting that the U.S. stock
market will soon fall, while natural gas will soon rally.

Shartsis, a professional options trader and broker with
R.F. Lafferty in New York, monitors a wide – and sometimes
bizarre – variety of statistics, indicators and sentiment
surveys to divine probable market trends...or reversals of
trend.

Jay Shartsis: 9% Correction Overdue

Presently, for example, he notes that "a near-record number
of days have passed since the last 9% correction in the
stock market." He infers, therefore, that a 9% correction –
at least – is overdue.

"We are close to an all-time record, going back to 1950,
regarding the time that has passed since the last 9%
correction," Shartsis notes. "The longest such stretch came
between the 1990 bottom and a 9.7% correction in the first
quarter of 1994, a period of 1,280 days. Presently, we are
at 1,113 days, the second longest stretch recorded in 55
years.

"One would think that this condition alone is creating a
very high degree of complacency. After all, nothing seems
to put a dent in this market – not rising oil prices or
gold prices or threatening international situations or
breaks in leading stocks like Google... Not yet anyway!

"This one-way market is no doubt responsible for the near
record inflows into Schwab equity funds recently reported.
January flows were the biggest since February 2000. That is
a warning sign that tells us that the inevitable correction
is close.

"It is interesting to note," Shartsis continues, "that the
prior corrections that followed the five longest periods
with no 9% correction came in months other than the
infamous month of October. They were February to March 1994
(9.7% decline), January to April 1953 (9.4% decline), May
to June 1965 (11% decline) and August to September 1986
(10.2% decline). For the record, the preceding data come
from McMillan Analysis."

Jay Shartsis: Natural Gas Rally Phase

Meanwhile, over in the energy markets, Shartsis is looking
for an important new rally phase in natural gas. Curiously,
Shartsis' bullish forecast relies on none of the typical
fundamental arguments. He does not predict that cold
weather will draw down inventories, or that Gulf of Mexico
production will continue to lag behind pre-hurricane
levels.

Instead, he cites the extreme bearish sentiment of
commodity advisors toward natural gas. "The price of
natural gas has gone into free-fall since its big top, just
under $16, struck on Dec. 13," Shartsis notes. "The low
seen a few days ago was accompanied by a 10-day Daily
Sentiment Index (MBH Commodity Advisors) reading of 12.7%
Bulls. For perspective, this gauge stood at about 80% in
the energy frenzy of last summer. The current level is the
lowest since 8.4% Bulls were recorded in September of 2004,
just before a sharp natural gas rally from near $6.50 to
over $9.00 in less than two months.

"The past week's price action also featured three up days
in a row after three down days in a row -- and that after
11 of 12 days down form Jan. 30 to Feb. 15. The top-notch
analyst Paul McCrae Montgomery has done work indicating
that a long string of one-way moves (up or down) acts like
an 'exhaustion' gap and often appears at the end of a move.
So," Shartsis winds up, "it looks like a good rally for
natural gas could be at hand here."

So far, the natural gas market is stubbornly refusing to
rally. Despite the fact that 16% of natural-gas production
along the Gulf of Mexico remains shut in, and despite the
news yesterday that U.S. natural-gas inventories fell by a
hefty 171 billion cubic feet for the week ended Feb. 24,
the gas price dipped during yesterday's trading session to
$6.54 per British thermal units, a level not seen since
early March of last year.

As the trading session drew to a close however, natural gas
reversed course to close the day at $6.76 per btu...Rally
caps, anyone?

[Joel's Note: If you stood by to watch everyone else make
bank on the recent rally in sugar you probably haven't been
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