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.

From Dave Landry’s column tonight, on what to do following today’s action in the market:

So what do we do?

I wish I knew.

Since I don’t: On the long side, wait to see if the market can break out to new highs and stick before looking to buy. If you took commodity related trades (e.g. ATI), look to “scale and trail” since those issues are becoming extended. On the short side, avoid new positions unless the market turns right back down. .

No setups tonight. Tuesday’s action really mucks up the charts.

Wow. Just when you thought…

The markets were ecstatic over the hope of an end to Fed rate hikes today, and staged their largest rally in a few months - on a day where crude oil hit a new record high. The Dow Industrials regained 195 points (+1.8%) to 11269. The S&P 500 moved up 22 points (+1.7%) to 1308, and the Nasdaq added 45 points (+2.0%) to 2356. The Russell 2000 was even better, added 20 points (+2.7%) to a new record closing high of 770. The Dow Transports shot up 2.5% and even the Utilities moved up 2.4%. Bonds also rallied, and sent yields down for the second straight day, today mainly in the middle of the curve: 6-month 4.89%, 2-year 4.84%, 5-year 4.87%, 10-year 4.98% and 30-year 5.08%.

Market internals were strongly positive, and volume surged higher on both exchanges, marking a clear ‘accumulation’ day. Advances/declines were better than 3 to 1 on the NYSE and better than 7 to 3 on the Nasdaq, with up/down volume about 7 to 1 on the NYSE and better than 6 to 1 on the Nasdaq. New highs/lows were 277/130 on the NYSE and 192/37 on the Nasdaq.

Nothing but green across the groups, and the numbers were pretty large, so we’ll look at the “2% or better” list: steel stocks (+4.2%), paper stocks (+3.9%), housing stocks (+3.5%), semiconductors (+3.4%), disk drives (+3.0%), natural gas stocks (+2.9%), natural resources (+2.7%), computer hardware (+2.6%), REITs (+2.4%), commodities (+2.4%), internets (+2.4%), oil stocks (+2.2%), networking (+2.2%), banks (+2.1%), defense (+2.0%), utilities (+2.0%), computer tech (+2.0%) and gold & silver stocks (+2.0%).

Energy prices moved higher still, but were completely ignored by the stock market today. Crude oil reached a record high close of $71.35/barrel, gasoline moved up to $2.22/gallon and natural gas cleared the $8 hurdle by a penny. The dollar was one of the few losers on the day, as the prospect of the end to rate hikes sent the dollar index down to 88.18. Precious metals enjoyed more gains, with gold moving up to $621/ounce and silver to $14.03/ounce in the spot markets.

BMB Note: I’m not quite sure what to say - I’m still a little speechless after today’s moves. How ’bout this: I’m glad I wasn’t short.

So how many “Fed is finished” rallies do we get to have? Haven’t we had a few already? This one kinda came out of nowhere, and it was a doozy. Does it change things? I think it probably does in the very near term - the longer term problems are still firmly in place, and some, like geopolitical events and the spike in commodities prices are only getting worse. But as far as stocks are concerned, I think you still stick with the strongest areas. One day’s gains isn’t going to save the worst sectors in the market. It will take some time to turn those around, if they are going to turn around at all at this point. I think you still go with what’s working and stay away from the weak areas, and we’ll see where this all leads.

My thinking is that we could very well get some upside testing here in the short term, barring any earnings disasters. Earnings can provide some wild moves, so anything can happen. Obviously, the wind shifted to the upside today, but this market has been very fickle of late. Tons of earnings out tonight, and tomorrow we get the doctored up CPI number and crude inventory data. I doubt that the CPI number will be anything out of whack, because enough steps have been taken to make sure it isn’t. If the number is totally benign, we could get even a little more juice to the up side.

If you’re smart enough to know what this market is going to do these days, you’re a lot smarter than I will ever be. After all, who would’ve thought that an 8% drop in housing starts would result in a 3.5% move up in housing stocks? The market is not logical.

A true contradiction in the market today.

On the one hand, stock prices are rallying like crazy because, for the umpteenth time, investors think the Fed may be getting near the end to interest rate hikes. The Fed-speak this morning started that, and the release of the minutes from the January meeting is just adding fuel to the fire.

On the other hand, we have record high oil prices (above $71), gasoline up another nickel to $2.22/gallon in the futures market, natural gas back above 8 bucks, and just about everything metal is at either multi-decade, or all-time highs. The precious metals are telling us that inflation is getting out of hand, but the Fed is telling us inflation isn’t anything to worry about. And of course, the hints that the Fed might be close to done is likely to squash the dollar.

This situation cannot persist. Either the high commodity prices have to back off, or stocks and the economy will have to cave under the pressure of the high prices.

Never being one to look a gift horse in the mouth, I’ll enjoy the higher stock prices for the moment. But I won’t count on them lasting for a long time…

The market is not logical.

The morning gains have increased, and from looking at the market today, you’d never know that oil was above 70 bucks a barrel and commodity prices were at quarter-century to all-time highs. So explain to me how with commodity prices going through the roof, there supposedly isn’t any inflation? Obviously, there’s something I’m missing here. Or the Fed has a few screws loose.

As for stocks, sometimes there’s just no good explanation. This market has been pretty tough to call of late, and it doesn’t look like it plans on getting any easier anytime soon. All you can do at times like this is to stick with what’s working, and don’t be afraid to take some profits now and then if you can. Trying to figure out what’s going to happen from day-to-day is a losing proposition.

Update: The reasons being given for the rally are the tame PPI report (ok, I’ll give you that one, but I can’t see how producer prices can stay low when commodity and energy prices are zooming, and you know what I think of government numbers anyway) and the weak housing numbers this morning (once again we see the case where bad news for much of the economy is considered to be good news for stocks, as everyone waits for the Fed to put a stop to rate hikes).

And last, but not least, we certainly can’t let a single day go by without hearing from a member of the Federal Open Mouth Committee. Today’s featured big mouth is Janet Yellen, president of the San Francisco Federal Reserve Bank:

Stocks rallied after Yellen said inflation should remain well contained in the future even if inflation risks are currently tilted “slightly” to the upside. She also said she expects energy prices to stabilize. In addition, she noted a significant moderation in house prices recently.

“This is a very balanced, positive comment on her part. In fact, it’s probably exactly what the market wanted to hear,” said Jim Awad, chairman of Awad Asset Management.

Never mind the truth - just tell ‘em what they want to hear.

Update II: Added link to Yellen article at Marketwatch.

A positive opening on the street today, sending the major indices modestly higher. Market breadth is positive, with most groups and the advance/decline lines nicely in the green. Leading the move amongst the industries are the steel stocks, natural gas, natural resources and commodity stocks. Airlines are getting a bounce after being smacked for the last few days.

Bonds are also edging higher, and that is bringing yields down, with the 10-year back just below 5 percent. The dollar index is down only slightly, but that hasn’t stopped gold from moving up to $617/ounce, and silver to $13.64. Unbelievable. Energy prices are higher, of course.

From Deron Wagner’s morning column today:

Overall, the short-term bias remains cautiously bearish, but the lack of confirmed institutional selling has us on alert. Until decent volume comes into this market, don’t be surprised by any type of erratic action such as false breakdowns and false breakouts. Remember that we are also in the heart of earnings season, and both positive and negative reactions to earnings reports can be exaggerated in low-volume environments.

If you’re interested, he’s also got some good advice on picking an entry point for a short position, using the IYR as an example. In short, wait for the bounce:

At this point, there is no doubt that the bears are in firm control of the Real Estate sector (REITs), but we definitely are not interested in selling short IYR at its current level. Instead, we have put it on our short selling watch list and are patiently waiting for a bounce into new resistance of its 50-day moving average. If you missed this initial drop in IYR, don’t fret because the second leg down is often more substantial and lower risk. However, as always, a proper entry point that provides a positive risk/reward ratio is required.

Good advice.

The big economic reports of the morning:

• Producer Price Index (PPI) up 0.5%, 0.1% ex-food & energy
• Housing starts fell 7.8%, with the biggest drops coming in the West and Midwest.