Bear Mountain Bull

It’s time again for a little BMB R&R, especially with the market behaving as bizarrely as it’s been. Maybe if we stop watching it start to behave a little better…

Posting will be very light and variable over the course of this week, but we’ll put up an open thread each market day for our readers to comment on the day’s market activity or to post any interesting links they might run across.

Check the space below for whatever the latest might be during this ‘off’ time, and please visit the various sites in the ‘Links’ and ‘Regular Stops’ for up-to-date market news and analysis.

BMB will be back in full swing by next weekend.

Fleckenstein chimes in on BMB’s “the market is not logical” theme.

BMB comments: I have heard it said that the current market environment is the most speculative ever, with volume in the bulletin board markets at all-time highs. I have heard it said that the online trading environment has made it “too easy” for the public, speculators or not, to have access to not only the stock markets but the futures markets as well. I have heard it said that easy access to information and charts has made too many into ‘chart traders’, and they pay no attention to fundamentals or economics - they are only interested in the next ‘trade’.

I believe that all those things are true in one way or another. However, the market is what it is. The individual investor has to try to understand how the market is behaving at a particular point in time and make the best of it — if you understand that the environment is speculative, then you can behave accordingly: you can choose to be defensive or stay out. If Fleckenstein is correct in that money managers are more concerned about their jobs than your money, the solution is to not entrust your money to them.

So you bought a few stocks a couple of months ago. They went up. You bought a few more — they went up too. Now you’re sitting on some pretty decent gains, in a matter of only a few weeks. You must be quite a stock picker — or are you?

Before you start soliciting subscriptions for your own investment newsletter, take a look at this:

At the lows in August, only 17% of S&P 500 stocks were trading above their 50-day moving averages. After the close on Friday, that number had grown to more than 90%!! More than 7 out of 10 stocks had moved from below their 50-day MA to above it. Now you know why they say, “a rising tide lifts all boats.”

One thing to keep in mind is that, historically, this is rare territory indeed. This three year chart shows that this level of market performance is not reached often, nor is it sustained for very long. Expect this level to recede rather quickly as stocks slow down. Of course, that doesn’t mean, necessarily, that the index will recede with it since the index is not equally weighted — larger stocks carry more weight.

This is just one way to track market depth and breadth. BMB will try to keep you informed of important changes “beneath the surface.”

Charts courtesy of StockCharts.com

One of the best ways for an investor to understand what is going on in the markets, and therefore help them decide where the best place might be to put their money, is to understand the relationships between the various financial markets — namely, the currency, commodity, bond and stock markets.

BMB highly recommends John Murphy’s latest book on the subject: Intermarket Analysis — Profiting from Global Market Relationships. From that book, here is a quick summary of the relationships between those four markets (for future reference, this information has also been added to the Investing 101 section):

• The U.S. dollar trends in the opposite direction of commodities.
• A falling dollar is bullish for commodities; a rising dollar is bearish.
• Commodities trend in the opposite direction of bond prices.
• Therefore, commodities trend in the same direction as interest rates.
• Rising commodities coincide with rising interest rates and falling bond prices.
• Falling commodities coincide with falling interest rates and rising bond prices.
• Bond prices normally trend in the same direction as stock prices.
• Rising bond prices are normally good for stocks; falling bond prices are bad.
• Therefore, falling interest rates are normally good for stocks; rising rates are bad.
• The bond market, however, normally changes direction ahead of stocks.
• A rising dollar is good for U.S. stocks and bonds; a falling dollar can be bad.
• A falling dollar is bad for bonds and stocks when commodities are rising.
• During a deflation (which is relatively rare), bond prices rise while stocks fall.

Currently, we are in an environment where commodity prices are rising and the dollar is falling. Stock prices fell from 2000 peaks but have risen since late 2002, in what many think may be a cyclical bull market within a secular bear or sideways market. Bond prices peaked in mid-2003, and many believe we are entering a prolonged period of rising interest rates (falling bond prices).

To take a graphical look at these relationships, check out the Intermarket PerfChart at StockCharts.com.

Looks like the health care sector remains an area to avoid.