John Mugarian's Dynamic Growth

I can't help but express disgust at irresponsible opinions that are expressed by some guests on the financial news channels. Over the past few weeks I have heard more than 1 guest express the opinion that rising rates, inflation, high oil prices, and rising deficits will not have an impact on the economy like they have in the past. In other words, "It's different this time".

Oh, no ! The last time I heard "It's different this time" was in 1999 when valuations for tech and internet stocks were through the stratosphere. Those of us who questioned the sustainability of those valuations were label as investors who "just don't get it". One thing I know for sure is this; its not different this time, and utimately higher interest rates, inflation, and oil prices will eventually cause economic pain.

As I watch the prices of oil react to even the most minor of events, I can't help but think of a comment Don Corleone made in the movie the Godfather. As Vito (the Don) was talking to his son Michael he said, "he refused to be a fool dancing on a string held by big shots". Well I hate to tell you my friends, we are all dancing on a string held by "big shots" when it comes to oil.

Now that everyone is focused on the oil crisis, the small investor is being suckered in to buying in at the high range of the most recent move in oil stocks. I'm convinced that investments in the major integrated oils will be great investments long term, but short term (6-12 months) we may be at the high.

So, what's going to trigger the next big rally in the stock market? How about a massive selloff in the price of oil. Now that Wall Street hedge funds have successfully sucked the small investor into oil stocks, its time to unleash the profit bombs on the little guy.

What's happening right now is the market is dominated by unrestricted trading vehicles like hedge funds. A report came out this morning saying there are now more hedge funds than mutual funds. Since hedge fund managers only make money from the funds profits, they will sell where there are profits. The money they have made came from owning coal, oil services, steel, basic material stocks, and shorting airlines, tech, cyclical, financials.

The US is threatening trade sanctions against China to prevent the total annihiliation of the US textile industry. If you go back and look at how many times the US has threatened sanctions against China, you'll see that all the threats are political grandstanding, and basically a joke. All these threats amount to nothing without swift and decisive action. I'll bet the Chinese are laughing in our face. The US is like a parent that constantly threatens to discipline a child and never follows through.

Ron Insana on CNBC brought up an issue we have been talking about for quite some time. If we take action against China, will they sell off our government debt and drive long term interest rates higher. My response would be, so be it. We cannot allow China or any other country hold a gun to our heads while we supply them with the ammo.
If China took any actions to damage the US economy, we should impose trade sanctions so severe that it would be a crime to eat chinese food.

Have you ever wondered how the market averages magically stop just above or just below a support or resistance level ? Who really moves the markets and who is really in control ? No, this is not one of those conspiracy theories, this is just plain ole common sense. For example, who caused the market meltdown during 2000-2002 ? It wasn't the big mutual funds and pension funds, they lost their shirts too. Who was it? Is this the guy that Warren Buffett calls Mr. Market? I don't think so.

No one will know for sure who these incredibily powerful manipulators are, but one thing for sure is that most investors do not understand the manipulators vocabulary. For example, in the late 1990's the manipulators were calling gold a worthless commodity and central banks around the globe were dumping gold like it was a bucket of trash. In 1999, the manipulators were saying that brick and mortar business were a thing of the past, and why would anyone leave their homes to shop when they could do it all on line. Well, believe it or not the manipulators are back again.

There seems to be as much noise surrounding the AIG debachle as there was when the 10 major brokerage firms had to pay a $1.4 billion dollar fine for lying and defrauding investors. Eliot (Ness) Spitzer let the cat out of the bag when he said that criminal charges have been ruled out, and a "civil resolution with the corporation will ultimately be achievable".

We knew this. Spitzer stopped short of (really) punishing Wall Street brokerage firms for cheating investors, what makes us think he is going to do anything different with AIG.

On April 6th, the SEC vote 5-to-0 approving the so-called Merrill Lynch rule, which allows brokers to offer fee-based accounts without registering as investment advisers. Since many investors don't know the difference between a broker and registered investment advisor, the Financial Planning Association suggested that investors should be given a warning label given the confusion in the marketplace over who is a broker agent, and who is a fiduciary investment adviser.

This ruling should come as no surprise since those in power at the SEC and the NYSE come from inside the securities industry. Never forget who rules Wall Street; Wall Street firms. Not the SEC, NASD, or the NYSE. I have said it many times and I'll say it again, be careful when you are dealing with a broker who works for a brokerage firm. And never forget who they work for. Be careful out there, and be careful who your Daddy is.

Oil prices dropped sharply last week and appears to have made at least a short-term price top. Longer term, the world does have a supply/demand problem, but for now its looks as if oil is ready to retreat and regroup. Today, oil prices fell $1.51 to $50.35 a barrel on the New York Mercantile Exchange.

This adds to or opinion that a drop in oil prices will trigger the next major rally in the market averages. Let me emphasis that I believe the drop in oil is temporary, and I will be a buyer of the major integrated and production oil companies when oil hits around the $45-$48 mark.

Investors have been puzzled by the markets refusal to rally in light of the recent sell off in oil. Well, the answer is very simple. Oil has not sold off enough to trigger a real rally. Once oil prices break decisively below the $50 a barrel mark, investors will gain confidence that the drop in crude prices isn't a head fake.

Go to this link on stockcharts.com: Oil (EOD)

You'll see from this chart that oil gapped above $50 in late February. This $50 mark now becomes a big test of support. Should oil break decisively below the $50 mark, we could see a sell off that could take prices into the low $40's.

Well, Wall Street has you right where they want you. In the south, keeping someone confused and preoccupied is called keeping someone "barefoot and pregnant". Today is option expiration and next week seasonality for the markets improve. Oil prices were lower this morning trading at $50.53/bbl. Once again oil appears set to test the $50/bbl support level again today. Soon, I think you'll see a sharp, but temporary break below the $50/bbl mark.

In the meantime, you traders can pick up some shares of the NASDAQ 100 (QQQQ) right here at $35.12. We are adding this to our "Big Picture" portfolio for a quick trade. Be patient before adding to your position in the integrated oils. Wait for around $48-$49 before adding. Our favorite picks are COP, XOM, PTR, and VLO.

Oil prices continues to hover just above the $50/bbl mark, as the stock market continues to wait for the next move down. As I watched the sell off the past few days, I noticed that the stocks hardest hit were the one's making investors the most money. It has become obvious that we are in a a hedge fund controlled market. Hedge funds are basically unregulated trading partnerships, and they only get paid on profits. Since HF's only get paid on profits, they have been locking in their gains in the energy and basic material sectors.

After a brief fall in oil stocks, I would expect the Hedge Funds to buy back their positions and get ready for the next leg up.

Oil prices are higher this morning despite news of another build up in crude oil inventories. Oil prices rose 67 cents at $51.04/bbl in early morning trading. Many of our favorite oil stocks jumped on the small rise in crude prices, which adds to our opinion that any meaningful decline in oil prices will be temporary. In fact, it looks like the hedge funds are buying back their energy positions after booking profits for the past few weeks.

I don't think we should get jumpy with the oil stocks just yet. After today's knee jerk rise in oil prices, 1 more meaningful decline may be in the works. Obviously, if you do not have a position in any oil stocks, today's prices are better than the prices 2 weeks ago.

The wild, menopausal swings in the stock market has captured the attention of even the late night talk hosts. Believe it or not, this is a good sign for the bulls. I am sticking with my call that the market will put on quite a show on the upside before reverting back to its bear market posture.

The up one day, down the next market activity is nothing more than a knee jerk reaction to short term economic data. I think its more important to focus on the trend of the data being released rather than a snap shot of one month or one week.

The breakdown in the market over the past few weeks has done some technical damage to the market averages. Can they be repaired ? I think so. I still believe that some news item (US stops adding to Petroleum Reserves) will be the catalyst for the markets to gap higher.

Longer term, and I've said this before, we will in all probability fall back into the claws of a bear market. I am convinced that any pullback in the price of oil, commodities and metals will be temporary. During the anticipated rally, we need to position ourselves in the sectors of the market that will reap the benefits of a commodity bull market.

It seems that every time the market puts on an impressive performance on the upside, the next day is met by profit taking. A market that seems to be constantly paddling upstream is never any fun. Of course, the reason's for this manic behavior is very simple; oil prices and fears of inflation. Well there is no need to fear inflation, you and I have been feeling it for months.

The catalyst for a meaningful rally seems to be right around the corner. I know I'm beginning to sound like a broken record, but the table is set for one more impressive show to the upside.

One day after President Bush and the Saudi Royal Prince held hands and spoke, a government report showed an unexpected build up in U.S. crude oil inventories. Unexpected ? I have been telling you for the past few weeks to expect a surprise announcement about the Strategic Petroleum Reserves being full. Today, crude oil fell $2.59 to $51.61 a barrel on the New York Mercantile Exchange. Unleaded gas futures dropped 8.32 cents to $1.5419 a gallon.

While this is a good start, is this the catalyst I have been talking about? I don't know. The next few days will tell us a lot. A major catalyst will be the petroleum reserve announcement. That news will trigger a sell off in crude which should send oil prices to the $48-$49/bbl mark. Since most selloffs over shoot on the downside, I would expect oil prices to dip below $45 before stablizing. .

The investor sentiment indicators as measured by the VIX, VXO, and VXN are beginning to show some slight anxiety among investors, but not enough to put in a temporary bottom. As a reminder, the three indexes above are sentiment indicators that measure optimism and pessimism in the market place. They are often used as a contrarian indicators since they also gauge investor expectations.

So, where is the turning point in the market ? Obviously Dow 10,000 was not enough to scare investors, but 9800 may start to get someone's attention. Once we hit the 9800 mark on the Dow, we should see the VIX index climb above 20, possibily to 25. This should be a good point for the markets to stage a turnaround.