Dr. Joe Duarte's Market I.Q. The Internet's Intelligence Digest Intelligence, Market Timing, And Trading Strategy For Traders and Investors MotherRock Collapse: Energy Hedge Fund Implodes. Oil & Commodities: Natural Gas Spotlight. Stocks: Employment Report. by Dr. Joe Duarte, Dallas, TX, August 4, 2006,   08:00 EST Pre-Market Summary: Traders may have a short day since the only economic report is the employment report and it's Friday late in the summer. Today's Economic Calendar: 8:30a.m. July Non-Farm Payrolls. Consensus: +150K. Previous: +121K. 8:30a.m. July Unemployment Rate. Consensus: 4.6%. Previous: 4.6%. Previous: -0.2%. Source: Wall Street Journal.com, Marketwatch.com. Hedge Fund Danger Resurfaces "Terrible Performance" And "Significant Losses" MotherRock, a $400 million hedge fund run by a former president of the New York Mercantile Exchange will be closing its doors due to heavy losses in natural gas futures. According to the Wall Street Journal: "One of the biggest New York hedge funds trading natural-gas futures, MotherRock L.P., is shutting down after suffering big losses in the natural-gas market in June and July. MotherRock, which at its peak in May managed about $430 million in assets, was formed in early 2005 by former New York Mercantile Exchange President J. Robert "Bo" Collins." Citing his "regret" for the losses to investors in a letter reviewed by multiple media sources, Collins noted the following: "We fully understand the implications of this drawdown. Our primary concern at this point is to protect investors' remaining capital." The fund was up 20% before fees in 2005, but ran into trouble in June and July of 2006, a period of falling natural gas prices a period of high volatility in the natural gas market, "after a seasonally unusual draw in gas from storage last week and a rally fueled by a heat wave across much of the United States." According to AP: "Drawing on his Nymex experience and his work as a market-maker for New York brokerage Pioneer Futures, Collins set up MotherRock with Conrad Goerl -- a former trader at Pioneer -- and John D'Agostino, formerly vice president of strategy and business development at Nymex. Prior to accepting a post as Nymex president in 2001, Collins led natural-gas trading at Houston energy company El Paso Corp ." Analysis It's not clear what strategy(ies) MotherRock was involved in, or whether there will be repercussions from this incident. What is clear is that periods of market volatility in any market, can often be related to both market factors and the consequences of those market factors on individuals and or insitutional investors. To be sure, a $430 million loss is significant to the investors in the fund, but should not necessarily be a risk factor to the entire market, unless, there is a significant chain of creditors that is left on the hook. According to the Wall Street Journal: 'The closure of the fund isn't likely to threaten other members or customers of the Nymex. "The system is working and clearing members or other customers are not currently at risk," said Nymex President James Newsome.' There are no indications that any of that kind of thing is ongoing with MotherRock, unlike the previous blow up in the futures markets, Refco, where an entire company was scuttled after its CEO was running a separate set of books and companies in order to hide losses. What makes this most interesting, though, is that MotherRock was run by someone with significant amounts of experience in the natural gas market, and presumably was well connected in the business, and likely had access to top notch information. Conclusion MotherRock seems to have been undone in a few days, with the bulk of the losses apparently coming in the month of July, as natural gas surged 31% in two days at the end of the month. So, if a hedge fund run by someone who presumably was a consumate pro in the business, and an expert in energy can go belly up in a couple of days, what are the posibilities of more MotherRock type issues developing if a hurricane hits the Gulf of Mexico over the next few weeks. Although there is no evidence at this point to suggest that MotherRock was involved in any unusual derivative trades, hedge funds are the base for high risk trading, including controversial instruments known as over the counter derivatives. In this kind of transaction, the two participants hammer out the deal, "over the counter," meaning that it is a private arrangement. So, rather than a formal trade, in a sense, the two participants are making a bet. These esoteric instruments are still controversial, due to the fact that each deal may have its own set of particulars. Yet, they are gaining in popularity. According to Global Investor magazine: "Chief operating officers at fund management firms are concerned more with the operational and technology challenges of over-the-counter (OTC) derivatives than any other issue, a poll suggests. Out of 32 "largest investment management companies" and third-party administrators, 89% of COOs and other senior operational people said OTC derivatives were their main spending priority for the year ahead." In fact, Wall Street is getting quite interested. According to Marketwatch.com: "Citigroup's new service (aimed at hedge funds) includes Linedata's Beauchamp asset-management software which allows hedge funds to use multiple strategies and trade equities, derivatives, swaps, fixed-income and over-the-counter structured products, the bank said." In other words, as more investment houses and trading venues get more involved with hedge funds and their aggressive strategies, the chances for an occasional bump on the road, such as MotherRock, are likely to rise. Oil And Commodity Summary: Natural Gas Spotlight Investors should pay close attention to their energy holdings as we head into the weekend, as developments in the Middle East and investor reactions to supply numbers this week, as well as the MotherRock issue could lead to price swings. Oil and natural gas prices remained steady overnight, as tropical storm Chris, although not a risk at this point, has yet to run its course, and the Middle East situation is still unfolding. Thus, at this point, the markets are starting to take out the storm premium from the energy markets, as supply fears ebb from a fairly benign supply report for oil on Wednesday. Natural gas supply showed a build up of inventories, discouraging traders on the long side. Natural gas stocks and oil stocks held up better, though. Crude oil is still testing the $75 area while natural gas was trading back below the $8 area. The Amex Natural Gas Index (XNG) and the Amex Oil Index (XOI) have acted well lately. Traders are still weighing the effect of a major heat wave, the chances of hurricane damage to supplies, and the effect of economic growth on demand. The $80 mark for crude oil looks like a distant goal for oil bulls at the moment, barring an escalation of the Middle East conflict, or another external event such as a major hurricane hitting the Gulf as happened last year. If crude oil prices can climb and stay above $80, though, for whatever reason, we could finally see that melt up in prices that has been predicted for some time. Chart Courtesy of StockCharts.com The Wilderhill Clean Energy Index is trying to bottom out and should be carefully watched here, as an oversold bounce may develop in the next few days, if the marekt holds up. Chart Courtesy of StockCharts.com The Philadelphia Oil Service Index (OSX) is still above the 200 area, and its 200 day moving average. Chart Courtesy of StockCharts.com The Amex Oil Index (XOI) made an all time high on 7-31, another in a string of several records over the last several months. World War III? $100 Oil? Protect your portfolio with the new how to manual on getting started in futures trading. Dr. Duarte's New Book "Futures And Options For Dummies" (John Wiley & Sons) 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. Order your copy today. Technical Summary: Chart Courtesy of StockCharts.com Employment Numbers Key To Rally Traders are likely to react to the latest employment report, due out at 8:30 Eastern time. Anything above or below expectations is likely to move stocks, bonds, and currencies, as the market begins to handicap the Federal Reserve's next move on interest rates. The Fed Funds futures markets have been decreasing their prediction for a rate hike during the August Federal Reserve meeting, as Fed governors have suggested that the Fed knows that the end game is now under way with the rate hike cycle. But other central banks around the world are raising interest rates, making the dollar vulnerable to interest rate moves by central banks. The S & P 500, the current market's leader, is up against a key chart point, the 1280 area, where it has run into trouble in May and June, before pulling back. For now being patient, and being able to pick our spots for trading, has worked. But nothing works forever. And any nasty surprise could lead to a market decline. Still, until proven otherwise, sector and stock specificity, as well as above average cash levels are likely to remain the key to success in this market. Remember also, that we are still in the usually bullish seasonal period starting on the last day of the month and running through the first five days of the new month. That means that as of the end of trading today, any seasonal bullishness will have evaporated, and the market will once again be flying on whatever outside influences to do expectations. Thus, we still suggest caution and strict adherence to what's working at the moment, large cap S & P 500 stocks. Our S & P Spyder trading model is now an open long. The S & P has been benefiting from one fact, money flows have turned away from growth, toward reliable earnings, such as those produced by large drug stocks, big oil stocks, and consumer non-durable companies. Big oil stocks, utilities, consumer stocks, and large drug companies are starting to see some money flows are increasingly strong with the Amex Pharmaceuticals Index (DRG) and the Consumer Index (CMR) both testin key long term resistance areas. Still, if technology was to make a bottom, and start to rally, the current climate fits the bill of such a set of developments, given the doom and gloom on the sector. Commodities React To News Natural gas remained below $8 in the nearby September contract. Crude oil is still straddling the $75 area with the $80 resistance level proving tough. Gold is still trading inside the $600-$675 area, with prices responding to news reports from Israel, but also responding to economic news. Check our energy section for bond, gold, dollar, and currency recommendations. What To Do Now See all our sections for new recommendations. This is a good time to follow the money, but to be prudent in allocation. In other words, this is not a time to be 100% invested, even in strong sectors. The bond market is also interesting. See our bond trading model, on our energy page. There are some interesting stocks in the health care and energy areas, as well as our Fallen Angels portfolio. Our ETF trading systems have been adjusted with our utility trading model finally getting a wake up call. See the energy section for details. Remember, our Fallen Angels portfolio is designed for those seeking a potentially diversified portfolio with a longer term time frame, and offers both long and short recommendations. 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 Sentiment Summary: No Worries Before Employment Report Traders either left town early, or just aren't worried about the employment report, as put/call ratios showed little fear on Thursday. We like seeing lots of worried hedgers. As we noted here the Monday (7-24-06) rally in stocks took the put/call ratios to nearly bearish levels, again raising doubts about the viability of the rally. There have been some bullish readings in the option ratios of late. The real question is whether there is enough bearishness in place to launch as sustainable rally, though. Healthy advances tend to rise on the back of worry warts who buy put options when the market falls. But, as the bear market that ended in 2003 showed over and over again, rising put/call ratios are not enough, in and of themselves, to keep a bull market going. When the market falls and put option buyers are absent, it is often a sign that more selling is coming. The CBOE Put/Call ratio checked in at 0.89, falling from 0.97. 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 1.57.. Numbers above 2.0 as the market sells off, often lead to rallies. 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 14.46 and 21.12, both drifting lower. 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 (DOOG) rose to 45% from a reading of 15%, after it fell to zero on 6-23 staying in buy signal territory, for its fifth week in a row. NYSE insiders were sellers of stocks for the week of 7-14-06. 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 rose to 62% on on 7-28-06, again remaining neutral after several consecutive sell signal levels. This indicator has been calling for a pullback in stocks for several weeks. Buy signals occurr when the indicator falls to 40% or less. Market Moves Exchange Stocks Not Encouraging Shares of the Chicago Mercantile Exchange (NYSE: CME) and the Nasdaq Market (Nasdaq: NDAQ) are not predicting a bright future for the markets. Chart Courtesy of StockCharts.com The Chicago Merc shares have been an excellent predictor of the price of oil and other commodities over the last few years. CME usually leads the rallies in commodities, or falls in line fairly quickly, as traders start to price in rising trading volume and the potential for higher profits for the exchange. Lately, though, CME has been trading between 450 and 500, and is currenty straddling its 50 day moving average. The Nasdaq shares have lost 40% of their value since April, despite nine straight quarters of rising revenues, and fairly steady earnings. The lack of a major rise in the technology sector, and likely low expectations for any such rally at this point, are likely behind the lag in the NDAQ. Two things come to mind. First, dull markets are often the preludes to big moves. And second, it's usually a bad idea to short dull markets. Chart Courtesy of StockCharts.com The Amex Biotech Index (BTK) is starting to rise along with the drug sector. 650 is tough resistance though. Chart Courtesy of StockCharts.com The Amex Pharmaceuticals Index (DRG) again closed above 340, but is consolidating.. Chart Courtesy of StockCharts.com The Philadelphia Semiconductor Index (SOX) is again trying to bounce back. Chart Courtesy of StockCharts.com Small stocks are trying to bottom along with the market, but are not particularly strong right now. 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 1996-2006, 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.