Iraq Pullout Already Drafted.

Report: Iraq Pullout Already Drafted. Oil & Commodities: IEA: Oil Supply Trouble Ahead. Stocks: Earnings Slump Begins. [¹]

By Dr. Joe Duarte, | 17 October 2007

Decision Time

One Republican strategist is telling President Bush to stay the course in Iraq, and not to look for an exit compromise in Iraq. But one external source with a knack for sensational revelations says that the pullout from Iraq is all but a done deal.

A great deal of activity is under way with regard to the U.S. role in the war in Iraq. The situation in the country is deteriorating, as sectarian violence, combined with the presence of international militants threatens to plunge the country into total chaos [[millions, including the entire intelligentsia, have fled; thousands are still fleeing every day; hundreds are still being gratuitously killed and wounded— including bombs being deliberately set off on children's playgrounds : normxxx]].

And making matters worse, there have been reports of 140,000 Turkish troops having been amassed on Iraq's northern border, aiming to attack a Kurdish rebel group that has threatened the Turkish government.

So what's going on? Let's get up to date.

The New York Times, over the weekend, reported that an intense battle over the U.S. and its future in Iraq was ongoing at the White House. The White House denied the reports on Monday.

Republican strategist Bill Krystol, wrote an op-ed piece in response to the Times article on Monday, encouraging the White House to stay the course, and not to back down or make any deals now.

IEA: More Supply Trouble Ahead

The International Energy Agency (IEA) added a warning about the global oil supply to its prediction of supply shortages of natural gas.

In a report issued on July 9, the IEA issued a "dire" forecast, "warning of an impending crunch in the supply of oil and natural gas needed to power world economic growth in coming years."

The situation, according to the IEA is multifaceted but includes several key factors: 1. Supply is leveling off from both OPEC and Non-Opec producers. 2. Demand is rising, both from the industrialized and developing world. 3. Refinery capacity has stalled, creating a bottleneck for product supply.

According to the Wall Street Journal:

"The agency expects oil supply to be tighter in coming years than it had previously forecast, with little prospect of relief except a possible easing should world economic growth falter."

Even more daunting is this:

"The IEA now forecasts that the Organization of Petroleum Exporting Countries will have precious little spare capacity left to pump extra oil by 2012. It also expects supply increases from non-OPEC oil producers and biofuel producers to start flagging after 2009. Natural-gas markets will also be tight because of inadequate supply increases, limiting the ability of consumers to switch between oil and natural gas. Still, demand for oil and gas is expected to grow at a brisk pace in the years to 2012."

Natural gas prices have been diving to new lows lately, which is why we have been watching the sector carefully, looking for a low risk entry opportunity.

We think that opportunity may not be too far off, and may be set off if and when the first major storm of the season hits the Gulf of Mexico's natural gas production zone.

Oil has moved above $71. Natural gas is hovering near the $6.50 area.

Until proven otherwise, the rising tensions in the Middle East, and the potential for tight product supplies remain two key reasons for price "stickiness" at the recently reached higher levels, barring a significant change in the overall situation of supplies and/or global tensions.

Energy stocks have continued to hold up, and remain a viable portion of a diversified portfolio. But, being very careful in the energy sector at the current time remains the best strategy, given the potential for wide price swings.

$70 is still a key chart point for crude oil, while natural gas has been fading lately, after failing to rally above $8.

Chart Courtesy of StockCharts.com

Chart Courtesy of StockCharts.com

Technical Summary

Chart Courtesy of StockCharts.com

Earnings Slump Begins

Alcoa and Home Depot delivered less than sterling news overnight, so stocks look ready to slump in the early going. This is no surprise, since earnings season is well known for its volatility, and often features huge air pockets, where stocks drop signficantly when they miss expectations or forecast a less than rosy future.

Still, there is no excuse for being careless. Thus every positions should be monitored on its own merits, and trading rules should be followed carefully.

One way to cut risk is to use a seasonally based trading approach, either as part of your overall trading plan, or as the primary approach.

Otherwise, it's a good opportunity to be patient, and to focus on strength.

We still like what we see in the semiconductor area, which continues to hold up, and could get a boost as chip sales showed a modest increase in the last quarter.

The S & P 500, remained above its 50 day moving average, another positive. Nasdaq continued to show improvement, but is due for a pause.

Remember this, as earnings season and its inherent volatility unfolds: A successful trading program requires several things, patience, attention to detail, risk management, and a sustainable trend.

A sustainable trend, up or down, allows for the steady adjustment of risk, meaning that sell stops, or buy stops if you're selling short, can be adjusted over time, giving the opportunity to reach a profit. Volatile markets increase the chances of being stopped out prematurely, thus, making it difficult to make money.

In these types of markets, there is a need to be patient. And patience usually gives traders the feeling that they are missing opportunities to make money. When that happens, inexperience leads to over trading, which tends to increase the opportunity of losing money.

In other words, as it has been for the past several weeks, the best strategy is to stick with what's working, and give this market time to work out its own kinks, without taking too much of our money away.

Think of alternatives to stocks, such as bonds and the dollar, which are still offering a unique trading opportunity, shorting bonds, and being long the dollar [[Not recommended for anyone who is not familiar with the commodities markets: normxxx]].

Otherwise, be patient. From a longer term stand point, based on historical trends, this should be a positive year for stocks, given the fact that it's the third year of the Presidential Cycle, which calls for rallies in the third and fourth years of a presidency.

Our long term forecast remains upbeat, unless the major indexes fall convincingly below their 200 day moving averages.

Normxxx    
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