Dr. Joe Duarte's Market I.Q. The Internet's Intelligence Digest Intelligence, Market Timing, And Trading Strategy For Traders and Investors Iraq: Oil Industry Funds Insurgency. Oil & Commodities: War Of Words Lifts Prices. Stocks: Bounce Overdue. by Dr. Joe Duarte, Dallas, TX, February 6, 2005,   08:00 EST Pre-Market Summary Traders will be trying to work with post Super Bowl hangovers as the war of words with Iran races to a fever pitch. The pre-market stock index futures were higher. The U.S. Dollar was higher. Asian markets closed higher. European markets were higher. Treasury bond yields were flat. The U.S. Ten Year note was trading with a yield of 4.54% in electronic trading. Crude oil was trading near $66. Gold was trading near $573. Today‘s Economic Calendar: No major economic releases today. Source: Wall Street Journal.com. Today's Analysis: Iraq Oil Money Finances Insurgents Corruption in Iraq's oil industry runs far and deep, as insurgents may "reap 40 percent to 50 percent of all oil-smuggling profits in the country," says the New York Times quoting estimates made by Ali Allawi, Iraq's finance minister. Indeed, Iraq's oil wealth is likely being siphoned off to support the ongoing insurgency, adding another layer of difficulty to an already tense situation. In one example cited by the Times, Allawi described a situation in which "the insurgency had infiltrated senior management positions at the major northern refinery in Baiji and routinely terrorized truck drivers there. This allows the insurgents and their confederates to tap the pipeline, empty the trucks and sell the oil or gas themselves." According to the New York Times: "Iraqi and American officials say they are seeing a troubling pattern of government corruption enabling the flow of oil money and other funds to the insurgency and threatening to undermine Iraq's struggling economy." The Iraqi system is increasingly corrupt. According to the Times, one example of the depth of the correction includes "a sitting member of the Iraqi National Assembly (A Sunni lawmaker, who) has been indicted in the theft of millions of dollars meant for protecting a critical oil pipeline against attacks and is suspected of funneling some of that money to the insurgency, said Radhi Hamza al-Radhi, the chairman of Iraq's Commission on Public Integrity. The indictment has not been made public." Another example, a more recent one, according to the Times took place on Saturday, February 4, when " the director of a major oil storage plant near Kirkuk was arrested with other employees and several local police officials, and charged with helping to orchestrate a mortar attack on the plant on Thursday, a Northern Oil Company employee said. The attack resulted in devastating pipeline fires and a shutdown of all oil operations in the area, said the employee, who was granted anonymity because he was not authorized to speak publicly about the matter." Mr. Allawi told the Times that ["It's gone beyond Nigeria levels now where it really threatens national security," Mr. Allawi said of the oil industry. "The insurgents are involved at all levels."] The corruption is embedded throughout the system and includes the border guard. "In some cases Iraqi guards on the Syrian border have been paid off to let stolen shipments through, and the oil is then sold on the black market." And there is more: ["The former oil minister, Ibrahim Bahr al-Ulum, told the London-based newspaper Al Hayat late last year that "oil and fuel smuggling networks have grown into a dangerous mafia threatening the lives of those in charge of fighting corruption," according to a translation by the BBC. Mr. Ulum said in an interview with the television network Iraqiya that raids on "smuggling dens" in Baghdad had netted forged documents and tanker trucks."] The work of countering the corruption is dangerous. According to the Times: "The reports of corruption have set off a major reform effort in recent months, with American advisers assisting internal investigations and promoting new rules like requiring financial disclosure forms for government officials. But the changes have often been stymied by intimidation and violence. Iraq set up a new post in each government ministry to do internal monitoring, the inspector general, but two of the officials were assassinated last year just as they were about to publicize the results of investigations. Six other employees of the Commission on Public Integrity have been killed, and the rest live in constant fear of retaliatory violence." Some of those in charge of controlling the corruption have been corrupted. "Some of the officials in charge of fighting corruption appear to have been drawn into it instead. The Iraqi inspector general program has suffered from "significant missteps and lapses in progress," and several inspector generals have been relieved of their jobs pending indictments, according to a State Department report on Iraq's reconstruction efforts. The threat of violence has also deterred many Iraqi journalists from reporting on corruption, despite a campaign by American officials, who have optimistically declared the week starting Feb. 19 to be Anti-corruption Week." According to the Times: "The Iraqi government has begun requiring all employees to sign a code of conduct, and all high-level officials must fill out complete financial disclosure forms. But 40 percent of them have refused to do so, saying they fear that filling out such forms will be equivalent to telling kidnappers what ransom to charge, Mr. Radhi said. There have been some successes, he said: eight government officials have been convicted on corruption charges and sentenced, though many more have escaped prosecution by fleeing to other countries." Conclusion Over the weekend, during our radio spot on Financial Sense Newshour with Jim Puplava, Jim noted that President Bush's call for U.S. independence from Middle Eastern oil in 25 years, was the first acknowledgment by a high ranking American public official of the Peak Oil phenomenon. Our response was that indeed this time was different. Indeed, Mr. Bush has started what could be a major move into alternative fuels, or at least more aggressive exploration of U.S. oil sources for the near future. But more than anything, Mr. Bush's call for "independence" from foreign oil suggests to us that the lid on significant new information, such as the corruption in Iraq, has been lifted, as the case for "independence" starts being made. Oil And Commodity Summary: War Of Words Lifts Prices Editor’s note: Our energy section has expanded to cover mining and transportation stocks. See the latest on bonds and currencies also. Gold was trading near $573. Oil was trading near $66. Oil was back above the $66 pivot point in pre U.S. trading on 2-6. German Prime minister Angela Merkel, speaking at a security conference in Germany, suggested that Iran's nuclear program was creating a similar situation to that seen before World War II erupted, loosely comparing the situation, not the Iranian regime, to that created by Naziism. At the same conference, U.S. Secretar of Defense Donald Rumsfeld told the audience that Iran's nuclear program must be stopped. Some reports, quoting Israeli defense sources suggested that Israel is in the midst of planning its air strike strategy against Iran. The rising rhetoric came as Iran's nuclear program was referred to the U.N. Security Council for review, and Iran officially re-started its uranium enrichment program. Reports last week, disclosed the existence of documents, viewed by the U.N.'s Internationa Atomic Energy Agency, said to have been plans that can only be used in the making of a nuclear bomb, not for peaceful purposes as Iran contends it intends to use its nuclear programe. The situation continues to add a fear premium to the price of oil, whihc in our estimation is $10-$15 presently. Overall, oil supply is 11.4% above last year's level, while demand for gasoline and heating oil is starting to rise There is still the outstanding fact that roughly one-fifth of the U.S. Gulf of Mexico's oil and natural gas infrastructure is still off line, and will be off line for several months. And just as important is the fact that just as the rigs and platforms in the Gulf hopefully become operational, hurricane season, predicted to start in June, will arrive, again raising the potential for damage, and keeping supplies tight. Our very long term opinion on oil has not changed for months, and is being proven to be true, as supply problems, yet to be resolved, are now being compounded by the natural demand cycle of winter. We are still in a very long term bull market in oil, until proven otherwise, but it seems to be a market that is in the midst of a prolonged correction. The long term line in the sand, for us, remains $40 per barrel. That means that prices can correct to $40 and we could still be in a long term, secular bull market. If prices were to fall below $40, then the very long term trend will have likely reversed. Shorter term, if crude prices fall below $56, we could see a major move toward $40 gather steam. The Philadelphia Oil Service Index (OSX) pulled back after a series of all time highs. Chart Courtesy of StockCharts.com The Amex Oil Index (XOI) also pulled back. In the current market, we recommend a copy of Dr. Duarte's New Book "Futures And Options For Dummies" (John Wiley & Sons) . The book has an excellent section on oil futures as well as the currency markets, while covering and expanding on the successful strategies in Doctor Duarte's other books. Technical Summary: Chart Courtesy of StockCharts.com Bounce In The Cards Stock index futures were hovering near fair value in pre U.S. trading on 2-6. The Nasdaq 100 and the S & P 500 ended last week below their 50 day moving averages, a negative if not corrected in the next few days. Today is the last day for institutions to get new money into the markets, which could set a fairly positive tone. But any momentum failures in the next couple of days could send the market tumbling in the short term. There are some positives remaining though, as brokerage stocks have acted well recently, which is usually a good sign for the overall market. See our Fallen Angels where many brokerage stocks that were weak several months ago are listed. Gold And Oil Remain Above Key Support Gold continues to move higher, with new support now at $570. $600 looks as something that is looming. Oil took a tumble on 2-2 breaking below $66, but has clawed its way back. The dollar is trying to recover, but continues to struggle. Check our energy section for bond, gold, dollar, and currency recommendations. What To Do Now Despite the recent bounce back in stocks, it's still a time to be careful, and to stick with strength. We have added short sales throughout our portfolios to go along with our long recommendations. Keep your options open, and protect your profits by paying attention to sell stops. Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems for the latest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, and technology have also been updated. Chart Courtesy of StockCharts.com The Iran Effect Option players braced for negative events on Friday. A big wall of worry is building, although the market has yet to deliver a rally based on the rising pessimism. For the fifth day running, index option traders have been buying protection in the form of put options, taking the index put/call ratio way above 2.0. The index Put/Call ratio closed above 2 on 1-30, and 1-31, and now 2-1, 2-2, and 2-3 is suggesting that some are hedging against possible negative surprises, either in economic data or the geopolitical situation. But not all players are bearish. The UBS Index of Investor Optimism delivered a reading of 93% in January, the highest number we've seen in this very good gauge of investor sentiment. The high reading of this indicator, when put in the context of recent readings in put/call ratios, our own Overbought/Oversold gauge (see below) and the overall market, suggest that this is a momentum market, and that disappointment will likely lead to heavy selling. The CBOE Put/Call ration checked in at 1.08 on 2-3, another climb, after a very light reading of 0.58 on 1-24. The latter falling from the 1.08 on 1-20, still below the 1.22 on 12-20. The ratio was 1.31 on 10-13, near the market's bottom. A consistent string of low readings can be a sign of excessive optimism and often signals a top in the markets. Readings below 0.5 are of concern, but not as serious as readings below 0.40. Readings above 1.0 are bullish. The numbers cited here are meant to be evaluated on a closing basis. The CBOE P/C ratio for indexes checked in at 2.50 on 2-3, following the 2.44, on 1-30, and the 2.37 on 1-31, clearly outpacing 1.91, the recent high reading on 1-20. This ratio was 0.87 on 1-6, another reading below 0.90. 2.37, the recent high that occurred on 12-20 was enough to predict the current rally. The index closed at 2.37 on 11-29. Readings below 0.9 suggest too much bullish sentiment, just as readings above 2 are usually required to mark major bottoms. The VIX and VXN had readings of 12.96 and 17.53 on 2-2, both rising. When these indexes begin to rise, it is a sign of concern as rising volatility indexes suggest that an acceleration of the prevalent trend is on its way. A fall near or below 20 on VIX and 30-40 on VXN is considered negative, a fact that is usually confirmed when the volatility indexes begin to rise. Readings above 40 and 50, respectively, are often signs that a bottom may be close to developing. The Duarte Overbought-Oversold gauge remained at 82.5%, still a very high reading, with 80 being overbought and 40 and below being oversold. NYSE insiders were heavy buyers of stock for the week of 1-20-06. NYSE insider short sales are still at very low levels. When NYSE specialists raise their short sales, and sell stocks, risk increases dramatically. There is a two week lag for these figures. Market Vane's Bullish Consensus checked in at 69%, near a sell signals. The UBS sentiment gauge, a fairly good sentiment survey in 2005, shot up to 93 in January. It correctly called the rally in October with a reading of 47. Market Moves Exxon Mobil Lags While Valero Doubles Exxon Mobil (NYSE: XOM) continues to lag while Valero (NYSE: VLo) has raced on. The question is why? Chart Courtesy of StockCharts.com Exxon Mobil makes more money in one quarter than some countries budget for their entire operations, yet the stock is mired in a trading range while a major long term bull market in oil rages on. Exxon seems to be the Rodney Dangerfield of oil stocks, delivering huge revenues and earnings, only to have Wall Street yawn. The stock is up 18% since May 2005, as of 2-3-06, but others, like Valero Energy have doubled in price over the same period. Exxon delivered 100 billion in revenues in its most recent quarter, and has 33% return on equity, while trading at 11 times earnings. Valero has delivered 56 billion in revenues over the last nine months, and trades at 12 times earnings while delivering a 26% return on equity. Conclusion Either the market is missing the Exxon story, or the market knows something that will eventually come out about Exxon, such as a surprise reduction in reserves, or some kind of accounting problem. Clearly, we're baffled by the action in the shares of Exxon. Disclosure: Dr. Duarte does not own Exxon or Valero. Chart Courtesy of StockCharts.com The Amex Biotech Index (BTK) is still testing the key resistance area near 720. Chart Courtesy of StockCharts.com The Amex Pharmaceuticals Index (DRG) has also held up reasonably well DRG has held steady of late, but could turn weak along with the market. The large druge sector continued to act well, and is testing the resistance near 336. The index is showing signs of life, and may be groping for a bottom, although its time may be running out. The index slid to a new low on 11-30. 299 is long term support that is being approached. Chart Courtesy of StockCharts.com The Philadelphia Semiconductor Index (SOX) could falter if the market fails to hold up. Chart Courtesy of StockCharts.com Small stocks have been leading the market, but are not likely to hold up too well if a major down draft develops. You may access the daily subscriber's password protected reports on the website,     by clicking here. These reports are also updated daily, but not emailed. © Copyright 1996-2005, Kollar Market Analytics, Inc., All Rights Reserved. Market IQ reports may not be redistributed without permission. Disclaimer: The financial markets are risky. Investing is risky. Past performance does not guarantee future performance. The foregoing has been prepared solely for informational purposes and is not a solicitation, or an offer to buy or sell any security. Opinions are based on historical research and data believed reliable, but there is no guarantee that future results will be profitable.