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.

BMB has said it before, and will keep saying it: the Fed’s decisions on interest rates will be determined by the strength or weakness of the dollar. Mike Hartman, in tonight’s market wrap at Financial Sense, agrees:

Bill Gross says to watch employment data to see what the Fed is going to do, but I would like to add that we should be watching the dollar very closely. If the dollar begins to sink notably lower, the Fed will be forced to continue raising interest rates. Overall commodity prices have been going through the roof! Global consumption of commodities is still sky high and looks to continue increasing. The Fed says they are on inflation watch which should be considered synonymous to defending the strength of the dollar. The U.S. dollar is the “tool of control” on the global scene…they can’t afford to let it go into freefall. If foreign governments continue with announcements of divesting dollars for euros, gold and other currencies, bonds will sell-off, but stocks should get worse. If necessary, stock prices will be sacrificed to save a cratering bond market. I expect interest rates to continue rising as much as is required to keep the dollar showing some semblance of stability.

The market didn’t give up any more ground today, but it didn’t exactly turn things around either. The major indices managed slight gains on the day: the Dow got back 40 points (+0.4%) to 11130, while the S&P 500 added a point-and-a-half (+0.1%) to 1288 and the Nasdaq gained 4 points (+0.2%) to 2315. The Russell 2000 fared a little better than the big boys, gaining 6 points (+0.8%) to 748. The Dow Transports were higher by a quarter percent and the Utilities gained 0.1%. Bonds had another bad day, sending long yields right back up. We find the 6-month at 4.90%, 2-year 4.90%, 5-year 4.91%, 10-year 4.98% and the 30-year at 5.05%.

Market internals were positive, but volume fell back to very anemic levels, not providing a lot of encouragement. Advance/declines were 16 to 15 on the NYSE and 17 to 13 on the Nasdaq, with up/down volume 5 to 4 on both exchanges. New highs continue to pull in, with highs/lows 50/107 on the NYSE and 65/63 on the Nasdaq. Not very impressive numbers there.

Group action was a little better, with most groups in the green, but not too many big gainers. Gold & silver stocks led the way, up 2.4%, followed by the beaten down HMOs (+1.9%) and biotechs (+1.5%). Housing stocks (-1.0%) led the losers.

Energy prices were mixed, with gasoline the story of the day, moving up to $2.09/gallon. Crude oil drifted down to $68.62/barrel after spending more time above $69, and natural gas slid to $6.81/mmBTU. The dollar index was slightly higher, to 89.58. Gold teased the $600 mark, holding at $598/ounce, and silver continues to amaze at $12.74/ounce.

BMB Note: I guess we can be somewhat encouraged that the market didn’t give up any more ground, but geez, it looks weak here. New highs/lows are really starting to converge. Volume was almost non-existent today - I guess I wouldn’t expect much more action tomorrow going into a holiday weekend, so there might not be much price movement either.

Interest rates won’t give up - the 10-year hit a new relative high today at 4.984 before backing off to 4.976. Gasoline is at 2.09, and it’s only Easter. That’s not a very comforting thought. If this keeps up, there might not be nearly as much driving done during the summer “driving” season.

I would remain pretty cautious in this environment. Seems like we’ve said that quite a number of times during the past year or two, and each time the market had managed to hold up pretty well. But one of these times, it’s not going to hold, and you need to be prepared to play defense when that happens.

You’ve heard the announcers on television when they say, “The move in General Motors today was worth more than 30 Dow points.” How do they know that?

Well, the Dow Jones Industrial Average is just that - an average. Rather than being weighted by market-cap or anything else, the Dow is simply a price-averaged index. What that means is that a 1-point move in a Dow stock - any Dow stock - means the same as a 1-point move in any other Dow stock as far as the average is concerned. That’s right - a 1-point move in GM stock, at around 20 bucks, counts the same as a 1-point move in Boeing, an 83 dollar stock.

When it comes to calculating the Dow Industrial average, the process is simple: add up the prices of the 30 Dow components, and divide them by the current Dow divisor. This divisor is adjusted periodically to keep the index movement and value consistent, like in the case of stocks splits, index changes and the like. The current Dow divisor is 0.12493117, or approximately 0.125, or one-eighth. So that means that a 1-point move in any Dow stock will move the average by about 1 / 0.125 = 8 points, up or down.

So next time you’re looking at a big 3-point move in a Dow stock, you can impress your friends by saying: “You know that move in XXX today?? That was worth about 24 Dow points!”

Update 7/27/2007: The current Dow index divisors can be found here. The divisor for the Dow Industrials index is now 0.123017848.

Update 2/26/2008: With the recent changes in the Dow Industrials index components, the divisor is now 0.122834016.

Don’t forget - markets will be closed on Friday in observance of Good Friday.

Not a lot of change anywhere. The majors are posting very small gains, and advance/declines are just slightly on the positive side. More groups are up than down, with some bounce in the beaten-down HMOs and biotechs, in addition to gains in gold & silver stocks and semiconductors. Airlines lead the losers, but the losses aren’t large at this point.

The bond market has pulled back a bit, and yields are a little higher. Not much change in energy prices. The dollar index spiked up early today, but has come back down, still hanging onto some gains. The spot price of gold is pushing $599/ounce, and silver is back up to $12.78.

The February US trade deficit fell from January’s record levels. Is the reduction meaningful? Um, probably not:

“We do not expect any considerable medium-term improvement in the trade deficit. Trade models suggest that with a stable currency and solid domestic growth the deficit will widen,” said economists at Lehman Brothers.