Bear Mountain Bull

Bill Fleckenstein’s weekly column on MSN, always an interesting read.

	The AMEX Computer Hardware Index (components) is having one heck of a year. Many thanks to Apple.
	The PHLX Street.com Internet index (components) has moved to new yearly highs.
	The AMEX Broker/Dealers index (components) has broken out to 6-month highs.

Charts courtesy of StockCharts.com

About all we’ve heard from the market punditry in the past few weeks is “the market wants to go higher” and “once we get past the election, the market will rally”. As a matter of fact, have you heard anyone at all say that there will not be a rally after the election? At this point, a rally after Tuesday seems to be a foregone conclusion. Easy money.

When BMB hears such a preponderance of opinion, he starts to question the “conventional wisdom.” As Humphrey Neill put it in “The Art of Contrary Thinking” (review coming soon in ‘Recommended Reading’):

“When everyone thinks alike, everyone is likely to be wrong.”

If everyone thinks — or just knows — that the market is going to rally, wouldn’t they have already bought in? On Friday, BMB wrote:

Is there going to be a so-called ‘election rally’? BMB isn’t so sure we didn’t already have it this week. Time will tell — the market will decide.

Will the pundits be right? Will the prevailing opinion hold true? We’re about to find out.

Even the laggards aren’t so bad these days. You know you’ve had a decent run in the markets when two of the worst five performing industries over the past week, and one of the worst five over the past eight weeks, are actually in the green over that period.

BMB talked earlier about the strong rallies in the markets this past week. So with all the action, how have the various industry sectors been affected, if at all?

	Utilites had a very good week — and look to continue to deliver solid performance for now.
	With the slight pullback in oil prices, many are thinking it could be the beginning of the end for energy stocks. So far, BMB doesn’t see it that way. There has been heavy volume action on the XLE over the past few weeks, but there hasn’t been significant damage done, as the price has found short-term support around the $34 level. We’ll be keeping a close eye on what happens with the XLE over the next few weeks.
	Consumer discretionary stocks have rocketed off the August lows, and last week shot straight up to the top of their YTD range, matching their highs of March and April. One wouldn’t think that the XLY can keep up this pace for long, but could easily rest a bit and move to new highs in the near future. If you’re wondering, the top 10 holdings (46.5%) of XLY as of 8/31/04 were CCL, CMCSA, EBAY, HD, LOW, MCD, TGT, TWX, VIA/B, and DIS. You can view all of the holdings here.
	Industrials are still hanging around the top of the range, but haven’t managed to bust out.
	Materials stocks may try yet again to break out of their trading range, after a failed attempt earlier this month. The series of higher lows since May is encouraging.
	Not surprisingly, the technology sector looks a lot like the Nasdaq chart.
	Financials had a nice move off the bottom — third time this year — but there’s some work to be done to get things moving in the right direction.

Here’s what the actual performance numbers look like, sorted by 8-week performance:

Health care and consumer staples stocks, even though they also had a good week, are still lagging the other sectors by considerable amounts.

Charts courtesy of StockCharts.com

The past week saw strong rallies in the markets on Tuesday and Wednesday, with very little give-back at the end of the week. So where do the markets stand right now?

	The Dow didn’t quite make it to the lower rail of the downtrending channel and reversed up strongly, partly due to recovery in the beaten-up insurance stocks and excitement over a pullback in crude oil prices. But that leaves the index right smack dab in the middle of that maddening channel again, and still hanging below its 50-day moving average.
	The Nasdaq rallied back up to its yearly downtrend line, even managing to exceed its previous October highs. Note that this area, around 1975, served as resistance just before the beginning of the year and as support during June.
	Lost in the excitement over the Dow, Nasdaq and oil prices was the move by the S&P Small-Cap Index to retest its October highs as well.
	The small-caps have considerably outperformed large-cap stocks since the August lows. This chart shows the relative performance of the ETF that tracks the Small Cap 600 (IJR) versus that of the IVV, which tracks the S&P 500 large-cap index. A rising line indicates that the IJR (small-caps) is outperforming the IVV, a falling line indicates IJR is underperforming the large-caps. For the investor, these ETFs provide an easy way to “buy the index”.

Charts courtesy of StockCharts.com

This article from IBD provides some guidance on how you might go about adding to your winning positions.

The markets did absolutely nothing to tip their hand as to their future direction today, with the Dow and S&P gaining just under a quarter of a percent, and the Nasdaq dropping less than a single point. The Russell 2000 fell just over one-third of a percent. The yield on the 10-year Treasury slid to 4.03%.

Internals ran right around 50-50 on the Nasdaq, and slightly better than that on the NYSE. Again, new highs outnumbered new lows, by about 9 to 2.

The losers became the winners again today. The oil and commodity stocks were the ones to rebound, after being beaten down earlier this week. Winning groups were computer hardware, oil & gas, gold, paper, chemicals and commodities. No major groups lost even as much as 0.7%.

The decline in the price of crude oil slowed today, with the price rising back above $51.50.

Before you go diving into the market trying to latch on to this latest rally, you might want to consider what some of the market risks might be.

Don’t forget, some believe that we may just be in the “9th inning” of the bull market off the ‘02 lows. Just be careful — if you decide to make a move, and you’re wrong, admit it to yourself and limit your losses.

Is there going to be a so-called ‘election rally’? BMB isn’t so sure we didn’t already have it this week. Time will tell — the market will decide.

For more football, that is.

Last night, while watching the Virginia Tech/Georgia Tech game on ESPN, the crawl on the bottom of the screen was promoting tonight’s game between Hawaii and Boise State. And then it said: “The second of 19 days of football on ESPN, ESPN2 and ABC.”

It doesn’t get any better than that.

Economists were expecting more than the 3.7% GDP growth reported this morning.

Seems to BMB that if economists were expecting 4.3%, they were expecting too much. The 3.7% number is a decent increase over Q2, and higher growth rates probably wouldn’t be easily sustainable.

The last big economic number before the election. If you don’t already know what each candidate will say about the number, then you probably don’t even know there’s an election on Tuesday.

The pattern on the XLK chart looks a lot like a larger version of the action back at the end of June.

Chart courtesy of StockCharts.com

I’m not saying he is or isn’t right about where the market is headed — just passing along the info. You can decide for yourself. But note that he doesn’t tell you where you should be if he’s wrong…

A further decline in the price of crude oil wasn’t enough to push the markets higher today, as the major indices all finished barely above the unchanged level on good volume, but less than yesterday’s high levels. The Nasdaq gained 0.3%, the S&P 0.2% and the Dow was basically unchanged. The small-cap Russell 2000 finished lower by 0.5%, and 10-year Treasury yield dropped just slightly to 4.08%.

Advances trailed declines just slightly, but new highs still outnumbered new lows by more than 4 to 1. The only industry gaining more than 1% was computer hardware. On the negative side, the news of China’s interest rate hike hurt the commodity stocks for another day. Oil services lost 2.3% and oil stocks lost 1.8%, with natural gas, gold, chemicals and commodities joining them in the losing column.

CNNfn to call it quits.

Apparently, not enough people are asking Jeeves.

ASKJ currently at $25.68, down $9.31, or 26.6%.

BMB just got another email from “Citibank” this morning.

Be extremely protective of your personal and banking information.

“Wall Street welcomed a green ogre with open arms today.”

China’s central bank raised its benchmark interest rate, for the first time in nine years, by a little more than a quarter-point.

Weekly unemployment claims rose more than expected.

Bernie takes a look at those big tech names: INTC, CSCO, MSFT and HPQ.

Update: Bernie has posted a follow-up article, this time with comments on IBM, ORCL, AMAT and the Nasdaq Composite.

Congrats to the Red Sox (and their loyal fans) on their first win in 86 years. Glad I got to see them win one in my lifetime. Now for the poor Cubs…

But really, even though the Sox won it in a sweep, could the actual series have been any more lame? Compared to the LCS series’, it was pretty dull, and filled with some pretty sloppy baseball. Come on, a team makes 4 errors in each of the first two games — and wins them both? At least the Cards could have played a little less like their Red Man had been marinated in Jack Daniels. I mean, what’s with a runner getting caught off third on a ground ball, no outs, and the infield playing back conceding the run? At least the whole thing ended with that dramatic tap-back to the pitcher…

I feel a little cheated — like I do after a Super Bowl blowout. Oh well, baseball’s out of the way. That means we can now have prime-time football 7 nights a week, right?

Near term support for crude oil looks to be right around $52. A close much below this level brings prices in the upper 40s into play.

Chart courtesy of StockCharts.com

A study on the VXO, another article from Schaeffer’s paid section, republished today. Once again, keep in mind this article was originally published back on 10/15.

BMB would have expected that the market action of the past couple of days would have sent the VXO plummeting back to much nearer the lows of the beginning of the month. Interestingly enough, that has not been the case. The VXO closed Monday at 16.87, and has only fallen to 16.13 after today’s trading (VXO chart).

For those who are not familiar with the VIX / VXO, here is a short description and links for more info.

We’ve looked at this chart a few times in the past week or so, but it isn’t getting any less interesting as the Nasdaq retests its October highs.

Chart courtesy of StockCharts.com

Buyers rushed in today as crude oil prices pulled back below $53, sending the markets higher on heavy volume.

The Nasdaq was the big winner of the day, gaining 41 points or 2.1%, finishing at 1970. The Dow tacked on triple-digit gains for the second day in a row, springing from yearly lows to above the 10,000 mark in two days. It gained 114 points today (1.2%) to finish at 10,002. The S&P 500 and the Russell 2000 gained 1.3% and 1.4%, respectively.

Advancers led decliners by 2 to 1, up volume bested down volume by 3 to 1, and there were about 4 new highs for each new low.

Too many winning groups to mention them all. The only losers were the commodity issues: oil & gas stocks, gold and commodity stocks.

Update: Also today, the bond market sold off to push the 10-year yield back up to 4.09%.