Bear Mountain Bull

I’m not sure if there will be a ChartWatchers newsletter this weekend or not. If so, this piece from Carl Swenlin will be in it. But just in case there isn’t a newsletter due to the holiday, I think his column and charts are worth a look:

A bullish take on the stock market would be that (1) market indicators are very oversold, (2) there is a triple bottom setup on the S&P 100 Index, and (3) sentiment polls show a lot of bearishness. I agree that those conditions exist, but we are in a bear market and these conditions can easily see price movement transition into a crash. The reason, as I have said many times before, is that bullish setups don’t always work so well in bear markets, and an oversold market can very quickly become significantly more oversold.

Let me be clear, I am not predicting a crash. If the market does crash, I will not claim to have “called” it, because that is not what I am trying to do. I want my readers to be aware of the danger and not try to pick the exact bottom of this decline. That bottom could be very far away.

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Bottom Line: We are in a bear market, and it is suicide to try to take positions anticipating the next rally merely on the evidence that the market is very oversold. Conditions are such that a sharp decline could materialize at any moment. This is not a prediction — I don’t suggest placing bets on it — just something that traders should consider. Bear markets are dangerous. Wait for solid evidence that a rally has begun before sticking your neck out.

The current oversold conditions haven’t changed Larry McMillan’s bearish outlook (click here for column with charts):

This bear market has shown just how nasty it can be. On Wednesday, new $SPX closing lows were made — below the March and January lows. Then, on Thursday, new intraday lows were made. The Dow had already violated its lows last week. Selling spilled into sectors that had previously been strong; in fact, it was nastiest in those sectors. It was as if hedge funds and other large traders were saying, “Sell what you can, not necessarily what you want to.” This is certainly a bearish development and opens up the downside for a whole new leg down, modulo any rallies that might spring up because of an extreme oversold condition.

The equity-only put-call ratios continue to remain on sell signals. The slight “wiggle” in the standard ratio last week was nothing to be concerned about. Even though these ratios gave sell signals back in late May, they still are not near the tops of their charts. Thus, they are not in oversold territory.

Market breadth has been terrible. Everyone is citing oversold indicators as reason for the market to bottom. We don’t necessarily buy it. Yes, there is certainly the possibility of a large, short-lived rally. Given the oversold state of the market, it could easily be 200-300 Dow points in a day. However, that won’t change the major trend (down).

Volatility indices continue to trend upward, which is bearish. $VIX made new relative highs, but is still lagging far below levels at which bottoms were made in January and March. The fact that $VIX has lagged is indicative of the fact that traders have not yet felt the need to buy out of the money ($SPX) puts in a panicky manner. They will, before this leg of the bear market is over.

In summary, our indicators remain bearish. Yes, an oversold rally is overdue, and it could be quite a doozy, for the declining moving averages are far above current levels ($SPX closed about 70 points below its declining 20-day moving average). However, unless our other indicators were to start to register buy signals, we look for lower prices after any such oversold rally runs its limited course.

The Energy SPDR finally gave up the 50-day moving average (red line) late last week:

Health Care and the Utilities have both been going sideways, but at different levels:

The others? Well, see for yourself:

Here are the numbers to start the second half of the year:

Charts courtesy of StockCharts.com

As you’re outside burning grilling those burgers and hot dogs today, take a moment or two - between sips of beer - to appreciate the efforts of all of those who fought to gain our independence more than 200 years ago, and say a prayer for all of those who are fighting to protect us and preserve our freedom today.

And hand that bag of chips over here, would ya?

Another mixed-up, mashed-up mess. We should have expected as much, considering it was a short, pre-holiday session

Indices were all over the place during the day, finishing mixed. Though the Dow was up 73 points, A/D lines were still pretty red and the Russell dropped the equivalent of 110 Dow points. So was it a good day or a bad day? Looks to me like it was more bad than good.

Here are the final scores:

Treasuries were mixed, with little change in yields:
6-month: 2.03%    2-yr: 2.52%    5-yr: 3.27%    10-yr: 3.97%    30-yr: 4.53%.

The Dow may have been green, but internals remained red. Advances/declines were 1 to 2 on the NYSE and 2 to 3 on the Nasdaq, with up/down volume 2 to 3 on the NYSE and 11 to 21 on the Nasdaq. New highs were a joke: highs/lows were 1/425 on the NYSE and 7/353 on the Nasdaq. Yes, you read that right - 8 new highs, and only 1 on the NYSE.

The gains in the indices were a bit of smoke and mirrors, considering that there were more losing groups than winning ones, and the only group to gain more than a percent was the drug stocks (+1.9%). Leading the losers’ column were the HMOs (-3.1%), natural gas stocks (-2.7%), disk drives (-2.6%), oil services (-1.7%), metals and mining (-1.3%) and the banks (-1.2%).

Energy prices were higher yet again. Crude set more records, closing at $144.35/barrel. Gasoline picked up a pennty to $3.56/gallon, and natural gas moved back up to $13.48/mmBTU. The Euro-heavy dollar index rallied after the ECB finally made its call, moving up to 72.76. That pulled the PMs back a bit, with spot gold dropping to $933/ounce and silver to $18.22/ounce.

BMB Note:   I don’t give much weight to shortened days like today, but it looked to me that even despite the gains in the Dow, the broader market was still fairly weak. We’ll find out more after the long weekend.

BMB will be enjoying a little time off since the markets will be closed. For all those in the US, have a great Independence Day, and for those that may be checking in from other countries, have a great Friday!

We’ll see you all on the weekend.

I’m not too sure how meaningful today’s action will be, being a shortened pre-holiday session - markets close at 1PM Eastern.

But the Dow has already seen a range of over 130 points from top to bottom this morning, bouncing all over the place. The indices are currently mixed, with A/D lines in the red. The groups show more red than green, with drug stocks, retail and internets leading the winners, while HMOs, natural gas stocks, metals, steel and gold and silver stocks lead the losers.

Treasuries are mixed. Energy prices are slightly higher. The dollar index took a morning jump, gold and silver are lower.

I know you probably get tired of BMB’s griping about how lousy government numbers are. But let’s face it: they ARE lousy. And if the public ever gets tired of being fed garbage, maybe some changes will eventually be made - but I won’t be holding my breath…

The Big Picture on this morning’s NFP report:

THE EMPLOYMENT SITUATION:  JUNE 2008 

BLS:

Nonfarm payroll employment continued to trend down in June (-62,000), while the unemployment rate held at 5.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.  Employment continued to fall in construction, manufacturing, and employment services, while health care and mining added jobs. Average hourly earnings rose by 6 cents, or 0.3 percent, over the month.

NFP payrolls shrank for the sixth consecutive month.

The big news was the revisions — down another 52,000 for April and May. When we get these revisions next month for June, don’t be surprised if we see a major change.

Also, note the Unemployment Claims jumped to 404k . . .

And now, the Birth Death Adjustment:

June 2008 was 177k versus June 2007 155k
Construction Gains +29k
Professional & Business Services +22k
Leisure and Hospitality +86k

The last is my favorite: Given the massive decrease in travel, an 86k gain in this sector is very hard to believe…

The two biggest items out this morning are probably the ECB’s rate hike (Sweden’s central bank also raised their key rate) and the government’s excuse for a jobs tally.

Index futures are pointing to a higher open - probably more of a result of oil’s early pullback from above the $145 mark than anything else.

Mr. Practical gives us a clear explanation of the inflation-deflation cycle - how we got where we are today, and even more importantly, where we’re going. Here’s the open and the close - I highly recommend you read the whole thing if you’re at all confused about what’s happening to our economic and financial systems:

Now that we’re getting a taste of what deflation is, it’s easier to talk about. Before, I tried to describe what to expect and how to deal with it, but in a way that was difficult for the average person to understand - especially when the government, the Fed, and Wall Street continue to misrepresent it.

Now that we’ve seen the beginning stages of deflation, it’s becoming clearer what’s going on and what’s important: to conserve capital. To save.

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For decades, but especially over the last seven years, central banks have “solved” any and all market dips, slowing economies, and financial problems by creating debt. If the stock market declines, just make it easy to borrow, so people can buy stocks. If the economy slows, just make it easy to borrow, so people can consume more. This methodology may work on occasion, but doing it systematically leads to crisis.

Central banks can’t fix this problem: They can only create more banking debt or transfer its risks onto taxpayers via TAF auctions or nationalization - which will only stabilize the banking system long enough for banks to dilute themselves massively by suckering investors into buying stock. More debt isn’t the solution.

So stay the course. Stay out of the way. Bottom feeders keep coming up empty. There will be rallies in stocks. Some will be quite vicious, but that doesn’t mean we’re in a bull market. The GDP’s going to go way down, but will eventually come back when debt is wiped out to a point where those with savings want to lend or invest again.

We have a long way to go, though - and risk is high.

The S&P 500 is the next of the major indices to test its March lows, sitting just a few points off those lows after registering a new closing low today.

Those hot coal stocks look to have topped in rather dramatic fashion:

And you can stick a fork in the steel stocks too:

Charts courtesy of StockCharts.com

Bounce? What bounce? Did you see a bounce? I must’ve blinked…

The hope for a bounce just turned into more ugliness today. The indices tried to fake it for a while, suffering from a morning dip, and then working their way back up to near the flat line early in the afternoon - but from there things just fell off the cliff. On top of that, some of the leading areas of the market were just completely destroyed.

Pretty ugly stuff, with the Transports getting smashed again:

Treasuries were slightly higher, but it wasn’t much of a ‘rally’ considering the weakness in stocks:
6-month: 2.04%    2-yr: 2.58%    5-yr: 3.30%    10-yr: 3.97%    30-yr: 4.51%.

Internals were clearly negative, but volume backed off slightly from yesterday’s levels. Advances/declines were 5 to 14 on both exchanges, with up/down volume 1 to 4 on each. New highs/lows were still pretty ugly, but new lows actually backed off a bit: highs/lows were 45/348 on the NYSE and 20/374 on the Nasdaq.

The groups were split much of the day, but only three were left in the green at the end: HMOs (+1.3%), disk drives (+0.4%) and drug stocks (+0.3%). But there were some pretty staggering numbers on the red side, where the metals - some of the leading stocks in the market - were ripped apart: steel stocks fell 13.0%, and metals and mining stocks were down 11.5%. And those weren’t the only sizable losses: airlines (-6.7%), homebuilders (-5.2%), transportation (-4.5%), commodities (-4.5%), oil services (-4.4%), chemicals (-4.2%), gold and silver stocks (-3.6%), oil stocks (-3.2%) and natural gas stocks (-2.8%).

Energy prices were mixed. Crude touched yet another new record above $144, finishing the day up almost three bucks at $143.57/barrel. Gasoline was also higher, at $3.55/gallon, but natural gas slipped 12 cents to $13.39/mmBTU. The dollar index fell back to its lowest level in weeks, at 72.04. The precious metals were higher - gold added five bucks to $944/ounce, while silver added a quarter to $18.34/ounce.

BMB Note:   Hmm. Even I thought we might be setting up a for a little bounce after yesterday. Nothing doing. But that’s why I don’t try to ‘guess’ what the market is going to do in my trading.

Today’s action is obviously not good news for the bulls. Probably the most disturbing development is the total destruction that took place in the steels, metals and coal stocks. Those are some of the last areas, along with the energies, that had still been holding up as the rest of the market tumbled. Today those metals and coals were totally shredded. So now they’re done too, at least for a time. I’m not sure there’s much left to turn to. Of course, if you’ve been careful, you’re not looking to go long here anyway, so no real harm done. But it doesn’t bode well for the overall market when the few leaders that remain are imploding.

Yes, we’re still massively oversold, and yes, we’re due for a bounce. But everybody and their mother has been waiting for it, calling for it, and some have even been trying to play it, even before it happens. I suppose it’s possible that we don’t even get one, and that we roll right down into some climactic move that puts in a near-term bottom.

I’ll stay where I am - on the short side of stocks, with the recent gains in the precious metals helping me out. It’s been working for a while now - and I’ll change when the market decides to. That ‘decision’ looks like it’s still TBD.

We’ve been sort of waiting to see if the day would come when the coals, steels, metals, etc. would finally give it up and crack wide open. Today looks like it could be that day.

Coals: PCX -15.7%, JRCC -12.8%, ACI -12.7%, MEE -12.0%
Steel: SCHN -13.5%, CLF -11.4%, AKS -8.7%, X -6.8%

A fairly quiet beginning to the day, as the indices are mixed around the flat line, except for the Transports, which are taking another hit. The NYSE A/D line is right at flat, while the Nasdaq’s is dragging in the red. The groups are split, with a few more green than red. Leading the winners are some of the beaten-down areas, like the banks, retailers and HMOs, with a few techs tossed in. Continuing to lose ground are the metals, steels and transportation. Also lower are the gold and silver stocks.

Treasuries are slightly higher, yields a bit lower. Energy prices are flat. The dollar index is lower after an overnight pop, gold and silver are slightly lower.

Deron Wagner’s assessment of the current market condition:

Even though we now anticipate a near-term rally in the broad market, it would be foolish to expect anything more than a tradeable, counter-trend bounce. There is an abundance of overhead supply, along with resistance of even the very short-term 10-day moving averages. If the major indices suddenly get their mojo back and start to move back above their 20-day exponential moving averages, we’ll re-assess the technical situation. But until then, we are viewing any new entries on the long side as strictly momentum-driven bounces that we are prepared to exit quickly.

Not a lot from what I can see - pretty much wrapped up in this little nugget from Minyanville. The Starbucks store closings, more rumblings on MSFT and YHOO, Blockbuster dropping their bid for CC, a warning from UNH.

The usual morning drivel…

US index futures are looking for a slightly higher open.

Update:   A weak ADP jobs report has brought the futures back down a bit, and sets us up for the gov’t jobs number tomorrow:

Private-sector firms in the U.S. lost 79,000 jobs in June, the biggest loss since November 2002, according to the ADP employment index, released Wednesday.

Employment in the services sector fell by 3,000, the first decline since November 2002.

Jobs in the goods-producing sector fell by 76,000, the 19th straight decline. Factory jobs fell by 44,000 and construction jobs dropped by 34,000. Employment in financial services fell by 3,000.

Job gains in May were revised lower to 25,000 from 40,000 earlier.

In his market summary tonight, Frank Barbera looks at the danger of the “open trench” that is presented by the banking stocks, and probably the rest of the market:

Things continue to take a dim turn for the worse, and it is a story that is getting more and more difficult to chronicle with each passing week. To the casual observer, the stock market is not doing well, the economy is not doing well, but perhaps there is still some ray of hope. Perhaps there won’t be a recession, perhaps things will be getting better sometime soon. We sincerely wish we could be that hopeful, that detached from what is truly taking place. As an observer of the stock market, it is crucial to understand the environment within which one is attempting to operate. In order to do this, a strong dose of stone cold reality is needed. One cannot conveniently ignore facts, brush past unseemly data, and only look at the rosy side of the fence. To do so is suicide – an invitation to let Wall Street and the markets separate you from your hard earned money, not to mention what this could do to your client’s accounts and their hard earned capital.

As if the poor price action isn’t enough to keep you out of the market…

Bennet Sedacca offers up “25 Reasons to Remain Cautious”. Here are a few for starters:

1.  Stocks are firmly in a downtrend.
The S&P 500 is down roughly 20% from the market peak on October 11, 2007.

2.  Corporate spreads are rapidly widening.
Investment grade bonds yielded as little as 0.30% more than U.S. Treasuries did back in 2003 - but are now as much as 2.30% above U.S. Treasury rates.

3.  Everyone I know is saying “All is well, buy America.”
The crowd is usually wrong at extremes.

4.  European equities are taking out the lows of the year.
European large cap stocks are now down more than 28% after peaking on June 20, 2007.

5.  The capital-raising window is closed.
Firms are losing their ability to raise new capital to sustain their operations. There have been several new corporate deals in the past couple of weeks that have failed to raise the desired amount of money.

	The steel stocks have been some of the strongest in the market of late. Today, the DJ US Steel index recovered after a probe below the 50-day MA - but the index hasn’t made any progress in nearly two months now.
	The chemicals look like they’ve topped…
	…and that mystifying run in the Transports looks like it’s over too.

Charts courtesy of StockCharts.com

Just a messy, topsy-turvy, all-over-the-map kinda day.

Stocks got hit out of the gate, just as the futures indicated. Then the indices rallied back into the green, only to sink to new lows around lunchtime, but then rally back up to around the flat mark again by the end of the day. Again though, the advance/decline lines never did confirm the green in the indices, staying well in the red for the entire day.

Today it was the Naz-100’s turn to lead the crowd, while the Transports lagged pretty badly:

Treasuries were fairly quiet again:
6-month: 2.08%    2-yr: 2.62%    5-yr: 3.33%    10-yr: 3.98%    30-yr: 4.54%.

Internals were mixed with a negative bias, with volume increasing above yesterday’s levels. Advances/declines were 2 to 3 on both exchanges, with up/down volume just below flat on the NYSE but just above the flat line on the Nasdaq. The new highs/lows numbers still look pretty pathetic, with more than 1,000 new lows racked up today: 23/537 on the NYSE and 17/489 on the Nasdaq.

The groups were split, with a few winners, like the homebuilders (+2.0%), banks (+1.9%), gold and silver stocks (+1.2%) and natural gas stocks (+1.0%), and a few losers: steel stocks (-3.2%), airlines (-3.0%), paper (-2.5%), metals and mining (-2.0%), transportation (-1.2%) and telecom (-1.1%).

Energy prices finished higher, but off their highest levels of the day. Crude gained almost a buck to $140.97/barrel, gasoline added a couple of cents to $3.51/gallon, and natural gas gained 13 cents to $13.51/mmBTU. The dollar index slipped back to 72.37. The precious metals had solid gains again, with spot gold up to $939/ounce and silver moving back above the $18 mark to $18.09/ounce.

BMB Note:   A wild day, but it doesn’t change much in my book. Yes, the indices managed to come back up off their lows, but internals remained pretty weak. That said, I’m sure the pundits will be hailing today’s action as ‘the bottom’ (watch/listen for it - I’m sure you’ll hear that more than once), and the market may use today’s reversal(s) as an excuse to move higher for a day or two or three - but today certainly didn’t have any signs of ‘capitulation’, so I think that any bounce from here will be nothing more than that - a bounce. The downtrend off the May highs remains firmly in place for now.

It’s hard for me to be convinced of any newfound market ’strength’ when the indices haven’t even taken out yesterday’s highs…

Keep an eye on gold and silver. They’re trying to edge above those recent ranges, and for those looking to enter, may be buyable on pullbacks. Your call.

The market was applauding the ISM index number out this morning - or so it seemed in that first hour. And the headline number was indeed better than expected.

But was the news good? Not really, says Michael Donnelly at CEO Economic Update (via The Big Picture). And you never knew there was so much info in this number…neither did I:

The Chicago survey of Purchasing Managers (PMI) jumped from 49.6 to 50.2, meaning the manufacturing sector went from recession territory to positive. And keep in mind the survey was expected to fall to 49. That sure sounds like good news, and many in the media (USA Today) (NY Times) will tell you it’s good news.

But unfortunately it isn’t.

The guts of the index tell a very different story. Orders were down from a month ago and are still in negative territory. This is now the 7th month in a row that orders have contracted.

True, ISM said production was up this month, and that should be encouraging, but it all went into inventory. In other words, companies are building at a healthy clip, but nobody wants it. Manufacturing inventory spiked up and was so immense we had the first month since April of 2006 where most manufacturing companies said inventory was climbing. In the intervening two years the majority of firms said inventory had been declining.

But that isn’t the end of the inventory story. Purchasing managers said that their customers inventory went through the roof, not surprising as deliverers were up. Their customers said their own inventory hadn’t piled up like this since January of 2001.

What comes next? Manufacturing will have to shut down to work off accumulated inventory, and get to a production level more consistent with sales. We are already seeing plans like this in the auto sector.

But the news gets worse when we look at the price component. Manufacturing firms are faced with prices they haven’t seen since the 1970s. Prices in the survey were at 68 in the diffusion index last year, and now sit at 91.5.

Remember it’s a diffusion index so a reading of 100 would mean that every single survey response said they faced higher prices, this only happened once in June of 1950. At 91.5 prices are the highest since July 1979, and it’s important to differentiate between “good” prices that occur from excessive demand. And “bad” prices which are shocks to the system outside our control.

The action has been mostly negative, but has been getting bounced around by the various numbers coming out from the car makers, with some worse than expected, and GM better than expected - though still far from “good”.

Quite a bit of bouncing around already this morning, as stocks opened lower, but the indices have managed to work their way back up off the lows and escape serious damage thus far. Advance/decline lines are still well into the red zone, however, and the Transports are getting hit much harder than the broad-based indices at this point.

The groups are split, but the big winner are limited to the gold and silver stocks and banks right now, with steels, metals, airlines, chemicals, transports, telecom, semis and networking leading the losers.

Treasuries are mixed - yields are up on the short end, but a bit lower further out. Energy prices are higher. The dollar index is slightly lower, gold and silver are higher.

More ridiculous finger pointing.

From The Big Picture this morning:

Welcome to the second half of 2008.

We begin the second half pretty much the same way we finished the first half:  Equities under pressure in Asia, Europe, and judging by the futures in the US, domestically as well.

One of the things that us foolish idealists hope for is that the current set of crises will force the fantasy brigades to actually start interacting with that hypothetical construct known as reality. Perhaps by confronting the actual problems facing the economy, we can actually begin the process of repairing them by taking the painful write-downs and instituting the medicinal policies that make sense.

Such hopes are misplaced. The latest evidence of such comes from no other than Blackstone Group (BX) CEO Stephan Schwarzman. On the occasion of the private equity firm’s one year IPO anniversary, Schwarzman places the fault for the current crises squarely on FASB 157.

You read that correctly: This was not the fault of incompetent lending to borrowers who could never afford to pay back mortgages; nor was it the fault of the rating agencies that slapped AAA on paper that turned out to be garbage; nor was it the responsibility of an MIA Fed that utterly failed in their responsibilities as the chief supervisor of the banking system; nor was it the liability of fund managers who in a misguided grab for yields bought billions of dollars worth of securities that they had no idea of the specific details contained therein.

No, it was the accountants’ faults. 

You see, those persnickety bean counters forced banks and brokers to actually write down paper for which there was no market.

You know, it’s never really broken my heart that Blackstone stock is down more than 40% from its IPO price.

None that I can tell…

European indices are down more than 2%, and US index futures are pointing quite a bit lower as well (Dow futures down 112) - and the pundits seem to be a bit lost as to the ‘reason’. There certainly isn’t any singular news item, and CNBC has fallen back on the ol’ standby: “oil prices and credit worries”. Yeah, right. Whatever.

Maybe the reason why there hasn’t been a great deal of panic in the market yet is because no one has even noticed that things are sliding…

From today’s Five Things:

2. The Stealth Bear Market

This barrage of economic non sequiturs has left us immune to any real measure of financial disaster beyond the amount of cash and coin in our pockets. We no longer even notice this process. We accept it and move on. That’s one reason financial disasters seem to skate along public consciousness generating only a vague sense of dumbfounded awareness; it’s a stealth bear market.

The New York Times tried to spell it out over the weekend - “Battered by Oil, Dow Touches Bear Territory” - but who can be bothered to pay attention to such things when there’s wine to be drunk and bill collectors at the door? What does it mean?

What we know is that through Friday the Dow Jones Industrial Average was down 20% from the October peak. But, really, it’s worse than that. The average stock in the Dow is off nearly 30%,  and some, like  American International Group (AIG) and Citigroup (C), are down more than 50%. Few on Main Street have noticed this, or even care anymore, mostly because they’re busy pawning jewelery to buy gas and groceries.

And then there’s this on the much-talked-about ‘housing help’ bill - which won’t be all that much ‘help’, when it comes right down to it:

4. Magnitude of Crisis Dwarfs Homeowner Rescue Bill 

As a native Kentuckian, there are two things I know with a deep cultural and regional certainty: the last race on the card at the track is called “The Widowmaker” for a reason, and, never offer up double-or-nothing to a reckless risk freak. I was reminded of these general principles when reading about the mortgage relief program slowly working its way through Congress.  

Gambling principles aside, the sad truth about this that proposal is it will only help some 400,000 borrowers. Meanwhile, more than 3,000,000 borrowers are in distress. Incredibly, as the New York Times noted this weekend (”As Bill Evolves, Mortgage Debt Is Snowballing“), there were 2,600,000 loans in trouble when Congress first began considering the issue. So essentially, by helping just 400,000 people, we’re right back where we started.