The Rude Awakening
Wall Street, New York
Wednesday, June 14, 2006 ------------------------- - The market Gods deliver a pummeling to previously
high-fiving investors,
- Does this mean one more chance to buy gold under
$600?
- Exhausted Wall Streeters and even more exhausted
market data for the week...
------------------------- Eric Fry, wide awake and reporting from Westchester County,
New York... Some individuals respond to adversity with a mixture of
courage and cunning...The rest of us simply take a nap. On yesterday's 4:49 PM commuter train out of New York City,
nearly every well-attired gentleman within your editor's
line of sight was sleeping. These exhausted Wall Streeters
had encountered far more adversity than they could
endure...without taking a nap. Yesterday's harrowing trading session continued a weeks-
long selloff that has pummeled all of the (formerly) most
popular stock sectors and asset classes. Commodities,
emerging markets and small-cap stocks all swooned under the
weight of fear-gripped selling. Gold tumbled more than $40 yesterday to end the New York
trading session at $562 an ounce – or $170 below the 26-
year high it had achieved just one month ago. Meanwhile,
emerging markets groped futilely for a lifeline. The
Russian, Indian and Brazilian stock markets have all
dropped about 25% from their recent highs. U.S. small caps
– and large caps and mid-caps and anything-caps – are also
struggling. In short, there has been no place to hide. 
By now, we would imagine, real people are losing real
money. Undoubtedly, many of our beloved Rude readers are
also feeling a bit of pain...and are asking themselves,
"What next?" We, too, are wondering what the financial markets have in
store for us. Is the selloff gaining strength...or nearing
exhaustion? Should we be hunkering down in some safe place,
if we can find one? Or should we be emerging from the
shadows to seek a ray of sunshine? More importantly, is the
big bull market in commodities ending, or just taking a
breather? Will gold recover from its shellacking, or revert
to its decades-long irrelevancy? We do not pretend to know the answers to these questions.
But we never lack for guesses. To preview our guesses: Gold
at $560 an ounce is better bought than sold, as is crude
oil at $68 a barrel and $6.00 natural gas at $6.00 an
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-------------------------
Helplessly Hoping
By Eric J. Fry The financial markets are sadistic and heartless...like the
underside of a boy's sneaker. That's why we investors
sometimes feel like helpless ants – scurrying for cover to
avoid the fatal thud of large capital losses. Occasionally,
we find our ant hole before the boy's sneaker finds us.
Other times, we are not so lucky. Recent market action has crushed the life out of many of us
investor-ants...or at least crushed the optimism out of us.
Perhaps, therefore, buying opportunities are drawing near. A few weeks back, as some Rude readers may recall, we
issued several columns warning of excessive froth in the
commodity markets. The columns entitled, "Blowoff" on April
20th, "Sell!" on May 2nd and "Oil Correction" on May 3rd
all expressed more fear than greed. [Joel, insert links if
you like] "We still love commodities – copper included – for the next
five years," the "Blowoff" column remarked, "but we love
them somewhat less (We never say "hate") for the next five
weeks. The price action in most commodity pits is way too
frothy, and the fundamental connection between price and
demand is way too tenuous. Parabolic price spikes in the
commodity markets are as numerous as stalagmites in
Carlsbad Caverns. "As long-time commodity bulls, we certainly don't object to
rising prices. But we do object to falling prices, which is
what we fear we might be seeing very soon. Asset prices
have an uncanny way of falling very sharply – and very
suddenly – immediately after they have been rising
parabolically. "In other words, we are delighted, but terrified," our
column concluded. "This delicious combination of emotions
may be appropriate in a roller-coaster car...or maybe even
in a bedroom, but not while sitting in front of a quote
screen." Immediately afterwards, most commodity markets began
falling. As prices slumped, investor bravado waned. The
confident smiles and high-fives of March and April
eventually yielded to the agonized groans of May and June.
We suspect, therefore, that buying opportunities will soon
present themselves...especially in the commodity markets.
Over the past couple of days, options pro, Jay Shartsis,
has observed a number of phenomenon that indicate bullish
trends will soon re-assert themselves. Put-buying is very high, for example. At the CBOE, 1.66
puts are trading for every call that is trading. "This
extremely high put reading, says Shartsis, "would
'normally' be associated with an outright crash, not a
market that's merely, let's say, rather flat. This is a
very high level of fear not justified by sharply dropping
prices. A rally is lurking." "Another indication of trader fear," Shartsis continues,
"is the very high volume in the SPDRs (SPY) vs. the volume
in its components. SPY short sales required no 'up tick'
and also offer tremendous liquidity, so they are a favorite
for hedging and short-selling. It is reported that over the
past three weeks, there have been three trading days in
which the SPY volume was more than the combined volume in
its components. This has happened only twice before in the
past 6 years. Those times were at the bottom following 9/11
and in July 2002 (Sentimentrader.com), both good market
lows. Therefore, even if we are back in a primary bear
market, there is room for a countertrend rally as took
place after 9/11 and July 2002." 
Lastly, Shartsis points out, the AAII sentiment indicator
is showing once again more Bears than Bulls (45% vs. 26%),
this being the fourth week in a row. Usually, consecutive
readings like this would occur at market bottoms. Over in the resource sector, the sentiment is also quite
poor, which suggests that most of the worst has passed.
Shartsis notes a few hopeful signs...especially among oil
service stocks and gold stocks. "In last Thursday's dramatic plunge and reversal," Shartsis
notes, "I observed a high number of oil stocks exhibiting
very sluggish action in their put contracts, even though
the stocks closed lower on the session. This is a positive
divergence often presaging a rally. Within the group, this
action was particularly evident in the oil drilling sector. Over in the precious metals sector, Shartsis notes,
"Newmont Mining (NEM $48.27 -.25) closed down only 80 cents
yesterday, with the price of gold still way down. I think
I have license to call this a bullish divergence and I also
note that NEM has had a lot of put trading of late, also a
contrarily bullish condition. Admittedly, buying into a gold market that has fallen $170
in one month – and $45 in one day – requires either courage
or stupidity, or both. Buying a diversified basket of
commodities, like those represented in Deutsche Bank
Commodity ETF (NYSE: DBC) requires somewhat less courage or
stupidity. But buying a lowly valued oil stock like Chevron
or ConocoPhillips requires the least courage or stupidity
of all. That's because the prices of oil company stocks are
languishing, even though the oil price has been soaring.
ExxonMobil is one of many oil stocks that has gone nowhere
for more than a year, while the price of crude oil has
advanced more than 30%. 
To be sure, the prices of blue chip oil companies might
continue slumping for awhile, but the supply/demand
fundamentals in the oil market are both clear and
certain...and bullish. Supply is finite. Demand is growing.
Prices therefore, seem very likely to rise...or at least
not to fall very far. Bullishly inclined investors might want to consider buying
call options on any one of a number of oils stocks. The
ConocoPhillips (COP) November 65 calls for $2.60 seem as
good a vehicle as any. We suspect call options on gold
stocks will also prove rewarding. But why bother with
Newmont Mining, when ConocoPhillips is selling for 6 times
earnings? [Joel's Note: Instead of taking a nap when things start
getting tough, how about taking some action? Commodities
are beaten, but not broken. This is the perfect time to try
out Kevin Kerr's Resource Trader Alert. You can bet there
will be some serious discounts on offer after this latest
shellacking in the marketplace...and that means serious
profit potential. Make sure you are part of it right here: 11 for 11 in '06
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