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April 11, 2005

Mob Psychology

To some high degree, the futures markets are all a function of mob psychology generated by what the public reads and hears in the media. You've certainly seen it, where a particular market is just ALL over the news, with tons of expert opinion on why that market can only keep skyrocketing (or plummeting) as it has been doing.....My experience has been, when you get everybody, and I mean everybody, just dead certain where a market is going, it's time to look in the other direction....Obviously, much of the time opinion is diverse and two sided, and provide no clues as to which way you might expect a market to move.....But then there are times when the message is loud and clear, black and white, unequivocably totally one sided.....I believe we are at one of those junctures in a VERY big way....perhaps more than I have ever seen it.....There are three or four sectors of the world econony in which opinion is virtually unanimous...And every one of those opinions is an expression of FEAR.

What are the FEARS and universally held perceptions of the markets now? What stories are ALL over the news?:

Oil is going up, up up....!!!!!!

Interest rates are going up, up, up....!!!!

The Dollar is going down, down, down....

Inflation is heating up!!! (driven by oil prices and Chinese/Indian demand for raw materials)

And, because of all of the above.....How can stocks possibly go up from here?...Right here, right now, everybody "hates" the stock market. Everything is working against it....

I really cannot ever recall a time when opinion was so one sided in so many markets at the same time.....and I totally disagree with every one of those opinions cited above....

I believe the following....and not just because the world seems to believe the opposite:

The whole bullish Oil thing is done....In fact, it probably started ending last October when spot Crude hit $55.65 a barrel, before backing off $15.00, then coming back up again to make a new high last week at $58.20 (now at $53.71) accompanied by calls it might hit $80.00 to $100.00 a barrel (???)....Maybe someday, but right now, I would bet that every oil producer in the world has begun selling production forward for years to come at current prices....and they will continue to do so, locking in all the $55 oil they can possibly squeeze out of the spigots....Wouldn't you?....As I wrote last week, energy prices should go down (to begin with) into the summer driving season, perhaps preciptiously so, led by Unleaded Gas.

Interest rates?.....Bonds are in a long term bull market that resumed their trend higher last year, precisely when the Fed started raising short term interest rates to head off inflation. The effects of those raises are just now beginning to enter the markets and I would guess, three to six months from now, the big Inflation Fear story will be long forgotten, replaced by reports of "inflation definitely under control".....As the inflation story recedes, I believe Treasury Bonds prices will be moving a lot higher, and long term rates a LOT lower.....Make no mistake, every day there are many millions of Dollars, Yen, Euro's, Rubles etc. that have to go into some long term debt instrument, somewhere on the planet, and our treasruy yields are still the highest (best) among all the major industrialized nations.....Money is not flowing away from Bonds, whether here or abroad....Quite the contrary, I believe there is a constant flow of funds toward the bond market while, at the same time, NOBODY is at all interested in selling quality paper with 5, 6 or 7 percent yields.....Low inflation, steady buying, and no real selling should push Bond prices a lot higher, and long term interest rates a lot lower. ......And don't forget that in the financially globalized world, American Stocks and Bonds, due to the decline in the U.S. Dollar, are now selling at a 25%-30% discount...

The Dollar?.......The Dollar Index made a low December 30th of last year and is now almost 5% above that low...even though every reference you see to it speaks of "the weak dollar", or "the dollar crisis", and FEARS of international dollar dumping. I think those sentiments are just way off the mark....The Dollar should go a lot higher. Remember, this is the market even Greenspan says nobody can predict and right now EVERYBODY is looking for  it to go lower.

Inflation?....Yes, there is a lot of talk about inflation now, as some prices have risen, but I believe that whole inflation hurrah (CHINA! CHINA! CHINA!) is behind us....Inflation would be worrisome if companies could just pass through higher raw material costs at will, which just is not the case today. The marketplace is just too competitive....You're seeing news about this company or that raising end product prices, but can they do so again, again? I say, "No way".....During the past 10-15 years, due to technology, globalization, and the internationally cheap labor pool, the world has been in, and will continue to be in, a highly competitive and generally price suppresive environment....Inflation has not been a real problem for years and aside from occasional periods of upward price pressures, we are not in an environment where people are running out to buy something today because they think it will cost more tomorrow....

And that brings me to stocks....As I said above, most of this stuff is just mob psychology and right now the psychology of the stock market seems to be downright negative, in particular, towards the Techs....There are too many "logical" reasons (FEARS) to stand up and say, "I'm a buyer!!!!", which is exactly what I think needs to be done here. I am buying June NASDAQ futures here, using both futures and/or options to do so. By the time the public realizes oil didn't go up, rates didn't go up, the dollar didn't go down, and inflation didn't go nuts?.....The Stock Market (Dow, S&P 500 and NASDAQ) should be a lot higher.

Here are some charts and numbers....

Sell Unleaded Gas

This is strictly a futures trade as option prices are simply too "rich"....After a 20 cent drop in 4 days, this is not the place to initiate new positions....If you are interested in doing this, some sort of rally would be needed to sell into...

4-11-05july05unleaded.gif (11183 bytes)


Buy Treasury Bonds

Bonds....The bull market that nobody in the analytic community wants to own....I DO.

4-11-05june05bond.gif (12885 bytes)

4-11-05sept05bond.gif (10706 bytes)

Buy U.S. Dollar Index

The Dollar....Roughly 98% of the past 25 years have been spent at higher levels...

4-11-05dollarcashmonthly.gif (13372 bytes)

4-11-05sept05dollar.gif (11600 bytes)

Buy Stock Indices
(Dow, S&P 500, NASDAQ 100)

In spite of all the "fears" out there, the Dow looks pretty solid to me, and basically has been consolidting for the past 16 months...It's more than due to go somewhere.....

4-11-05dowweekly.gif (12129 bytes)

4-11-05june05nasdaq.gif (11625 bytes)

Buy Cotton











Buy Cotton

And I am still VERY bullish Cotton...and still buying...

4-11-05july05cotton.gif (14116 bytes)

Give me a call if you have an interest in any of these ideas....For more background research on any of these markets, please visit our Newsletter Archives.


Bill Rhyne



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