Bear Mountain Bull

Blame it on Google if you’d like - but the truth is, the market wasn’t doing that great even before the GOOG news came out. The selling left the Dow with a 104 point loss, down 0.9% to 10993. The S&P 500 lost 13 points (-1.0%) to 1281 and the Nasdaq dropped 26 points (-1.1%) to 2281. The Russell 2000 fell 10 points (-1.4%) to 731. The Dow Transports gave up 1.1% and the Utilities lost 0.9%. Bonds moved higher, pushing yields down, except on the short end: 6-month = 4.74%, 2-year = 4.68%, 5-year = 4.60%, 10-year = 4.55% and the 30-year = 4.51%.

Not good news in the internals of the market - breadth was pitiful, and volume picked up pretty good today. That’s not real encouraging. Looking at the numbers, advance/decline figures were about 3 to 7 on the NYSE and 1 to 2 on the Nasdaq, with up/down volume worse than 1 to 4 on the NYSE and about 3 to 7 on the Nasdaq. New highs/lows were 101/35 on the NYSE and 130/41 on the Nasdaq.

No winners today, so we’re left looking at a bunch of losers. The worst were the biotechs (-2.3%), followed by steel stocks (-2.0%), gold & silver stocks (-1.7%), internets (-1.7%), paper stocks (-1.6%), healthcare products (-1.6%), housing (-1.5%0, computer hardware (-1.5%), defense (-1.4%), health care (-1.2%), brokers (-1.2%), drug stocks (-1.1%), HMOs (-1.1%) and software (-1.1%).

Energy prices were stable to higher, with crude oil moving up to $61.68/barrel and gasoline to $1.56/gallon. Natual gas was pretty much unchanged. Crude oil inventory numbers out tomorrow, natgas on Thursday. The dollar index had a bad day, getting dumped for 0.5% to 90.16. Gold moved up to $562/ounce.

BMB Note: Hmm. Ugly day. Very ugly day. Does it change my view? Not particularly, right at this point. I’ve been pretty cautious on the market, so toay’s action it didn’t surprise me a great deal. As we mentioned here yesterday, the lack of volume on the little moves up had been a concern, and the increase in volume today tells us that there may be more weight hanging around the market’s neck than had appeared. Then again, it’s only one day and critical support levels haven’t been breached yet. We’ll take our time and see what happens. If we get some follow through on the downside in the next few days, maybe we’ll take a little more bearish stance. As for now, I remain quite neutral.

Like the market, I’m going sideways. Cash, anyone?

Wow. The financial media is just all abuzz on the comments made by the Google CFO this morning. The market wasn’t in great shape before that, and that news just made matters worse. The major indices are all taking a pretty hit, and the A/D line has gotten much worse for now. The biggest losers are biotechs, steel stocks and internets, and there are no winning groups at the moment. Bonds have strengthened this morning, pushing yields down.

Energy prices are relatively steady, with inventory numbers due out tomorrow morning. The dollar is mostly lower, and gold has regained the 5 bucks it lost yesterday.

Oops. I’m not sure the Google CFO realized what would happen when he spoke this morning. He remarked something along the lines that search monetization gains had been largely realized, that the company’s growth was largely organic, and that the big growth would have to come from other areas. The clip at TradingMarkets says: ” CNBC Reports - Google CFO Says Search Monetization Gains Largely Realized; Growth Slowing And Now Organic.”

GOOG stock has taken a hit of nearly 10%, down 38 bucks to $352. Ouch. I’ll post a link as soon as a clear story becomes available. It’s a good bet there will be some sort of a statement or “clarification” from the company to try to defuse the situation.

Update: Here’s the quick blurb that MarketWatch tossed up on their site.

Update II: The folks on CNBC are simply “stunned” and “flabbergasted” that a CFO would make these sorts of comments on a webcast, just days ahead of an of analysts’ meeting or something that’s coming up, without some sort of prior statement or filing. It seems that the GOOG CFO might have stuck a rather large foot in his mouth today..

Economic numbers being released this morning, in addition to the GDP revision:

• Existing home sales down 2.8% in January, inventory up 2.4% to a 5.3 month supply.
• Consumer confidence February reading of 101.7 vs. 106.8 in January
• Chicago Purchasing Managers Index (PMI) Feb. reading of 54.9 vs 58.5 in Jan.

As BMB mentioned yesterday, volume has been weak of late. From today’s Wagner Daily:

Total volume in the Nasdaq increased by 12% yesterday, enabling the index to achieve a bullish “accumulation day,” but volume in the NYSE was 3% lighter than the previous day’s level. Despite the Nasdaq’s higher turnover, volume was still below its 50-day average. In fact, it has been six days since turnover in either exchange exceeded average levels. Institutional participation remains curiously absent and, as such, we need to be prepared for a swift move in the markets when institutional traders return to the scenes.

If only we knew in which direction that “swift move” would be…

Today we got the first in a series of numerous revisions in the Q4 GDP number. Today’s change bumped the initial reading of +1.1% up to +1.6%. The article details some of the GDP component readings that were altered.

The PowerShares ETF representing the Wilderhill Clean Energy index - symbol PBW - has been getting a nice pop from money piling in to alternative energy stocks. The PBW held up nicely as other energy stocks came down recently, and has now broken out of a very short base (Note: the price spike on Friday didn’t look legit - there was a flaky trade printed right at the open). Personally, I would have liked to see it go sideways for a while longer and let the moving averages catch up to it - it still looks a little extended to me, but a little pullback into the 20.50 range might be tempting. I’ll let you decide what to do here if you’re interested, but I’d have a stop somewhere below this short base. Disclosure: BMB already owns shares of PBW, so I’m not desperate to add to my position here. That doesn’t mean I won’t - I haven’t decided yet.

Chart courtesy of StockCharts.com

	The Dow remains above 11K, the S&P is teasing its January highs, the Dow Transports are hitting new highs, the Russell 2000 is hitting new highs…and very few investors seem to care.

Charts courtesy of StockCharts.com

The market managed to ooze its way higher again today, but as has been the case lately, the performance was less than stirring as volume was less than impressive. The Dow Industrials added 36 points (+0.3%) to 11098, the S&P 500 gained 5 points (+0.4%) to 1294, just a fraction below its January high, and the Nasdaq rose 20 points (+0.9%) to 2307. The Russell 2000 moved up 4 points (+0.6%) to 741 and a new all-time high. The Dow Transports also hit a new high with a gain of 1.1%, and the Utilities rose 1.1% as well. Bonds drifted lower, however, and yields moved up: the 6-month is at 4.72%, 2-year at 4.72%, 5-year at 4.65%, 10-year at 4.59% and the 30-year at 4.55%. For those of you keeping score at home, yes, the yield curve is still inverted.

Market internals were positive. Volume ticked up on the Nasdaq and was flat on the NYSE, but was still pretty weak overall. Advances/declines were 11 to 8 on both exchanges, with up/down volume about 11 to 8 on the NYSE and nearly 7 to 3 on the Nasdaq. New highs/lows still look good at 281/24 on the NYSE and 236/22 on the Nasdaq.

Leading the winning groups were the disk drives (+2.3%), retail (+1.9%), biotechs (+1.7%), computer hardware (+1.5%), airlines (+1.2%) and utilities (+1.1%). The short list of losers was led by gold & silver stocks (-3.4%), oil services (-2.5%), natural resources (-1.9%), commodities (-1.5%), natural gas stocks (-1.4%), oil stocks (-1.1%) and steel stocks (-1.0%).

Energy prices tumbled today, with no new threats over the weekend to supplies. Crude oil dropped about 2 bucks to $60.90/barrel, gasoline fell to $1.53/gallon and natural gas keeps getting cheaper, falling to $6.75/mmBTU. The dollar index edged up to 90.67, and the price of gold slid to $554/ounce.

BMB Note: Hmm. What to take away from today. More slippage in the energies and commodities. Nearing new highs in the S&P, reaching new highs in the Russell and the Transports. But volume is still anemic. What’s going on? Where is the big money?

I remain cautious. The lack of volume bothers me - maybe it’ll show up if more indices break to new highs. Certainly the bias is upward, but the power is missing. Where’s Tim Allen? We need more power. Arf, arf…

Ever wonder why the Consumer Price Index numbers didn’t seem to make sense? That’s easy — because they don’t make sense. You see, the calculation isn’t nearly as simple as you think it might be, or perhaps, as it should be. Or, for that matter, not as simple as it used to be. As with most government statistics, the numbers are tinkered with. And one of the biggest changes in the CPI came back around the time of the Clinton administration:

Up until the Boskin/Greenspan agendum surfaced, the CPI was measured using the costs of a fixed basket of goods, a fairly simple and straightforward concept. The identical basket of goods would be priced at prevailing market costs for each period, and the period-to-period change in the cost of that market basket represented the rate of inflation in terms of maintaining a constant standard of living.

The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that.

And that’s not all. Let’s not forget the ‘hedonic’ adjustments:

Aside from the changed weighting, the average person also tends to sense higher inflation than is reported by the BLS, because of hedonics, as in hedonism. Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from them. That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial, according to the BLS.

When gasoline rises 10 cents per gallon because of a federally mandated gasoline additive, the increased gasoline cost does not contribute to inflation. Instead, the 10 cents is eliminated from the CPI because of the offsetting hedonic thrills the consumer gets from breathing cleaner air. The same principle applies to federally mandated safety features in automobiles. I have not attempted to quantify the effects of questionable quality adjustments to the CPI, but they are substantial.

You really should read the whole article, “The Consumer Price Index”, by Walter “John” Williams of Shadow Government Statistics.

So far today, the market is trying to work its way higher. The major indices are in positive territory and breadth is on the plus side, more groups up than down, but not many huge moves yet. Winners thus far are disk drives (on a Sandisk upgrade - I hate these upgrades and downgrades that jerk stocks around), retailers, airlines, biotechs and defense stocks. Losers are in the energy/commodity space: gold & silver, oil services, natural resources, commodities, natural gas. You know the tune.

Bonds are only slightly lower, yields higher. Energy prices are lower, especially on the natural gas side. The dollar is mixed again - the trend there has been that the dollar is losing ground against the Yen, but gaining against the Pound and the Euro. Gold is lower by about 5 bucks.

In the weekly examination of technical and sentiment indications, Chris Johnson at Schaeffer’s believes that there may be a little more room on the upside for the market:

Bottom lining it for the week, the market should continue its move to the upside for the short term, though some resistance may become evident in day-to-day activity, especially on the SPX, which faces the most hurdles. The market will continue to benefit from the unwinding of negative sentiment that began in mid-February, though this environment could change quickly, warranting daily monitoring.

From MarketWatch.com:

Sales of new homes in the United States fell 5% to a seasonally adjusted annual rate of 1.233 million in January, the lowest in a year, the Commerce Department said Monday.

The number of new homes on the market increased 2.5% to a record 528,000, representing a 5.2-months supply at the January sales pace. The months’ supply is the largest in nine years.

There’s that “seasonally adjusted” phrase again. I guess numbers are never just numbers when it comes to these things. No surprise on my face that new home sales are slipping and inventories were rising. We’ve known this was coming. Even if there isn’t a ‘crash’, there was bound to be a slowdown.

And it looks as though some of the folks that bought the homebuilders up last week are selling them today…

BMB has been asking the same question that Bill Fleckenstein asks for some time now: if there’s no inflation, why does the Fed “fight” it? The truth is, there is inflation. You know it. I know it. And everyone but the government and the media knows it and admits it. But we continue to be fed bogus inflation figures that mean absolutely nothing.

Oh, and BMB readers will appreciate Fleck’s comments on housing and banks:

Thus, when I look at the universal denial of inflation on the part of the public at large, Wall Street and the Fed (witness Bernanke’s own projections for inflation in 2007 of 1.75% to 2%), I find it quite incongruous that the markets fear the Fed will push rates up to contain something that everyone has agreed is not a problem. (Speaking of the illogical nature of the markets these days, if folks are really worried about the Fed being tough, why are they piling into housing stocks? And why is the PHLX / KBW Bank Sector Index ($BKX.X) breaking out?)

John Mauldin takes a look at today’s yield curve, where tomorrow’s yield curve might be, and what it all means - especially in the context of the Fed’s own study of the yield curve and the Probabilities of Recession.

Even if you don’t take the time to read the whole thing, you may find it interesting to read the personal account of inflation experienced by John’s friend in the manufacturing biz. It starts like this:

And let’s be clear, there are inflationary pressures in the economy. Nowhere is this better illustrated than this letter from my friend Matt Kemp. Let me give you a portion.

“Something is bothering me that I must comment on. Maybe you are fully aware of the situation and think we are still ok. Our business is very liquid and totally debt free but I am very concerned. I am a 3rd generation business owner in manufacturing. (Machining of iron castings, steel bar, forgings etc.) Most components are to a Caterpillar Blueprint and are shipped to Cat plants all over the world. Many parts are precision machined and assembled for Earth Moving Equipment and On Highway Truck Engines. What is bothering me as one of the few left directly in manufacturing is the Hyper Inflation I am seeing. I don’t know if you are fully aware of what we are experiencing.”

And there’s more…

As a follow-up to yesterday’s post listing some symbols of stocks that had made interesting moves, don’t be lulled into thinking that all stocks are in great shape. Here’s a sampling of some recent moves that look shaky at best, and I didn’t even include all of the oil services names I saw (yesterday’s disclaimer applies):

AAP ATLS ACI BBW CLF CMED CONN CRM EFII FCL FCX FINL GGC LSCP LUFK NARA OIH OSI PDE PMTI RES RHAT RIG SMH SWH SWN SYNA TIN TNC

Items of note on the latest industry moves:

• Steel stocks. Where is that power coming from? Nice bounce back this week, and they’ve had quite a run.
• Housing stocks got another bump this week. Don’t ask me. I’m still waiting for them to finally roll over and give it up.
• Brokers maintaining strength, and a bounce in the banks this week.
• Biotechs hanging on to their upward bias.
• Energy stocks have certainly slowed their decline, with oil services getting the biggest rebound.
• Semiconductors beginning to fade a bit. Something to keep an eye on.
• For an even more detailed breakdown of group movement over various time periods, try Prophet.net’s Industry Rankings page.

Just a bunch of symbols to throw out to you - some stocks that have made interesting moves of late. Some have made moves higher, some are in pullbacks, some look like they may be shortable. I am in no way recommending that you buy or sell any of these names - they are just a few charts that caught my eye. I haven’t done any research past that point as to the strength/weakness of the groups they’re in — that part is up to you. And I’m sure there are many more - feel free to add your own in the comments section.

BEN CBSS CZN DTV FDX JAH FMC ITU IYZ MRK NBIX PCP QLTI RKH ROP SIL SMF TRI TTH UHS

Shorts: CHH RHAT TIN WBSN

I’m currently reading “Market Wizards” by Jack Schwager, the first in a series of three (I think) books that Mr. Schwager wrote, containing excerpts of his interviews with very successful traders. The first two books (”Market Wizards” and “The New Market Wizards”) were comprised of interviews with futures traders, while the third book (”Stock Market Wizards”) has conversations with stock traders.

This exchange with a gentleman named Ed Seykota, who turned in a healthy 250,000 percent return for his clients over sixteen years, caught my eye:

What are the elements of good trading?

The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.

How do you handle a losing streak?

I handle losing streaks by trimming down my activity. I just wait it out. Trying to trade during a losing streak is emotionally devastating. Trying to play “catch up” is lethal.

A little later in the interview, there was this:

What are the trading rules you live by?

a. Cut losses.
b. Ride winners.
c. Keep bets small.
d. Follow the rules without question.
e. Know when to break the rules.

Your last two rules are cute because they are contradictory. Seriously now, which do you believe: Follow the rules, or know when to break the rules?

I believe both. Mostly I follow the rules. As I keep studying the markets, I sometimes find a new rule which breaks and then replaces a previous rule. Sometimes I get to a personal breakpoint. When that happens, I just get out of the markets altogether and take a vacation until I feel that I am ready to follow the rules again. Perhaps some day, I will have a more explicit rule for breaking rules.

Never underestimate the importance of psychology and attitude as crucial elements of successful trading.

	Financials had the best week, as the banks finally came around to give the brokers a hand in carrying the load.
	Energy stocks still look a little shaky after their big fall — but are also still leading the way YTD.
	Tech stocks had the worst week of all, but that just keeps them range-bound for now.
	The Materials stocks didn’t do much this week, but the chart still looks pretty strong.

The numbers as the market tries to figure out what to do:

Charts courtesy of StockCharts.com

Seen on Yahoo:

On Saturday, Feb. 25, at 7:16 p.m. Eastern Standard Time, the population here on this good Earth is projected to hit 6.5 billion people.

So, would you tell me again how world oil demand is supposed to decrease, bringing prices down??

Not much action today, as the major indices finished mixed on unenthusiastic trading. The events in Saudi Arabia stirred up a little activity in the energy markets, but not a lot of movement elsewhere. Day’s end found the Dow Industrials down 7 points (-0.1%) at 11062, the S&P 500 up 2 points (+0.1%) at 1289 and the Nasdaq up 8 points (+0.3%) at 2287. The Russell 2000 was higher by 4 points (+0.6%) to 737. The Dow Transports were higher by 0.1% and the Utilities gained 0.4%. Bonds were little changed: the 6-month yields 4.72%, the 2-year 4.72%, the 5-year 4.64%, the 10-year 4.57% and the 30-year 4.52%. Yes, the yield curve is still quite inverted.

Market internals were positive but volume was quite light: the numbers I see show the lightest volume day of the year for the Nasdaq, and nearly so on the NYSE. Is this a holiday weekend that no one told me about? Advances led declines by 11 to 8 on both exchanges, and up/down volume was 5 to 4 on the NYSE and 3 to 2 on the Nasdaq. New highs/lows were 180/16 on the NYSE and 142/25 on the Nasdaq.

Winners on the day were gold & silver stocks (+2.5%), biotechs (+1.3%), natural gas stocks (+1.2%), natural resources (+1.2%) and oil stocks (+1.2%). Losers were led by the paper stocks, which fell 0.7%.

Energy prices were mixed, as crude oil jumped more than 2 bucks to $62.91/barrel and gasoline rose to $1.55/gallon, but natural gas fell to $7.11/mmBTU. The dollar was also mixed, but the dollar index moved higher to 90.64, and gold had a big day, rising back up to $559/ounce.

BMB Note: Those who thought we were on our way back to $40 oil will apparently have to wait until things settle down a bit on the geo-political front - that should only take a few hundred years. I’m not saying we’re going to $80 or $100 right away either, but the events in Saudi Arabia just prove that anything can happen, and probably will. That’s why oil is at $60 and will likely stay there, near there, or higher, for quite some time.

As for stocks, not much change. Waiting for some definitive movement one way or the other. The lack of volume is surprising, and doesn’t indicate to me that investors are real anxious to push prices higher. Then again, things could change Monday morning. Anything can happen. In the meantime, since interest rates have moved up nicely over the past few months, enjoy the four-plus percent returns in your money-market accounts. Here at BMB, we’re even rolling into some short-term treasurys to hope to follow the Fed up the rate hike mountain for a little while longer. Might as well get what you can out of your cash if it’s not invested elsewhere.

And I heard it on television again today - another guy who said they’re waiting for some weaker economic data to be reported, so that the Fed will be forced to stop raising rates — that’s bound to be good for stocks. While I don’t doubt that the market will pop when it becomes obvious that the Fed is done - simply because everyone and their mother AND their two dogs are waiting for it - I just can’t quite get the idea through my head that weaker economic news should be considered good news for stocks over the long haul. Ever. Maybe it’s just me… I’m a little worried that these folks will get a bit too much of what they’re asking for, and by the time the Fed stops raising rates they’ll be thinking of lowering them again because the economy is looking weak. We’ll see, won’t we?

Larry McMillan, in this week’s Option Strategist Weekly Updater (sign up here), sees that the bulls have a chance to move this market higher. However, that move would not be built on a very solid technical foundation - i.e., the market is nowhere near an oversold condition:

In summary, only one of our indicators — albeit an important one (the put-call ratio) is on a sell signal. Thus the market can certainly move higher. However, it is doing so without the benefit of true buy signals such as we saw last October. For example, while breadth may not be giving sell signals (especially, NYSE breadth), we are a long way removed from the last time that breadth was truly negative and oversold. Similarly, $VIX buy signals come when $VIX makes a spike peak. The last time that happened was over a month ago, and even that was a lukewarm spike — only to 14.50 on $VIX. So, while we feel that the market can move higher, we are not really enthused with its underlying technical backing.

BMB is not the only one waiting for the market to tip its hand before acting in either direction. Deron Wagner, in today’s “Wagner Daily” report, says the market is at a crossroads as the S&P tries to break to new highs and the Nasdaq attempts to break its downtrend:

More than any other time this year, the markets are at a crossroads. Obviously, it is risky to be making aggressive bets on either side of the market right now without first getting confirmation of which way the market wants to go from here. Because of this, we are not looking to enter any new positions until the market “makes it or breaks it.” Remaining mostly in cash will enable us to easily “hop on board” in whichever direction the market goes. Simply following the trend of the market is always easier and much more profitable than anticipating direction at a pivotal level. But above all, remember to trade what you see, not what you think!

A mixed mess. The three major indices are mixed, with the Dow down a bit and the Nasdaq and S&P just above the flat line. Advance/decline lines are mixed as well, barely positive on the NYSE and barely negative on the Nasdaq. Bonds have barely budged.

In the groups, the only real gains are coming in the commidities, energies and biotech, while paper stocks and airlines are pulling back. The dollar is mixed but little changed, but the price of gold has gotten a boost back up to $557/ounce. Energy prices are also mixed, with crude higher, but gasoline and nat gas a little lower.