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.

Start your day with the May housing starts and building permits, bright and early at 8:30 ET.

What’s up with HPQ stock? That’s one heck of a move, from below the 200-day to back above the 50-day and to the top of the recent range. All in three days, in a lousy market.

Chart courtesy of StockCharts.com

Rob Hanna isn’t so sure that the extreme sentiment readings we’re starting to see are a sure indication of a rally, and doesn’t think we’ve seen the market lows yet. Why? Because, much of the investing public probably hasn’t even noticed we’re down yet:

Currently there are many sentiment readings that are at or near extremely bearish levels. These would include Investors Intelligence survey, Put/Call Ratios, Rydex Asset Ratios and others. Additionally, some overbought/oversold indicators such as the Arms Index and the McClellan oscillator have also shown some readings that looked like the market was/is extremely oversold. Looking at some of the sentiment indicators would lead one to believe that the investing public has turned so negative on the stock market that it is bound to rally. I am not sure that is the case.

While the selloff the last month or so has been fairly strong and likely scary to those that are in the thick of it every day, has it been enough to truly worry the general investing public? I doubt it. The S&P 500 in my eyes is the most important index for investor sentiment. It has the most money indexed to it, and therefore best represents the performance of most people’s long-term stock investments (i.e. 401k). The S&P 500 still has not undergone any type of serious correction. From high to low over the last six weeks it dropped about 8%. This is not the kind of number that will scare most people with longer-term horizons. The lows of last week were merely the lowest levels the market has seen in the last seven months. In other words, most investors that have been putting money in over the last few years are still solidly in the black. You’re in the black if you began investing last summer. So what is so scary?

He makes a very good point. A lot of people won’t even notice the drop in the market until they open up their next 401k statement. And even then, they probably won’t think of doing anything differently until it’s been going on for 3 or 4 statements. Just in time for the bottom…

A follow-up to our post of earlier today:

After today’s action, I picked out a few more of the bigger names that look like potential shorts, if you’re interested: AGE, DE, GS, JEF, TXT.

Not recommendations, just observations. BMB holds no position in any of these stocks.

BMB told you we’d be seeing more and more articles like this one as ARM rates reset upward and we find out just how many people got into mortgages they either didn’t fully understand or weren’t prepared for.

Not a good day, no matter how you look at it - unless you’re eyeing the short side.

The bulls keep waiting for some follow-through to last Thursday’s big move, but instead they’re risking having the market give it all back. Today, the Dow Industrials fell 72 points (-0.7%) to 10942, the S&P 500 dropped 11 points (-0.9%) to 1240 and the Nasdaq lost 20 points (-0.9%) to 2110. The Russell 2000 did much worse than its big brothers, dropping 12 points (-1.8%) to 681. The Dow Transports were lower by 0.5% and the Utilities dumped 1.5%. What little movement there was in the bond market was also to the downside, and yields inched upward: 6-month 5.21%, 2-year 5.17%, 5-year 5.11%, 10-year 5.14% and the 30-year 5.18%.

Market internals were worse than the major indices let on, but the bulls will find a little comfort in today’s lower than average volume. Advances/declines ran 5 to 14 on both exchanges, with up/down volume about 1 to 4 on the NYSE and near 1 to 3 on the Nasdaq. New highs/lows were 31/153 on the NYSE and 51/136 on the Nasdaq.

The group picture was not very pretty either - only the airlines managed a meaningful move higher, gaining 1.0%. Leading the list of losers were oil services (-3.9%), natural gas stocks (-3.3%), natural resources (-3.3%), steel stocks (-3.2%), oil stocks (-3.2%), gold and silver stocks (-2.9%), commodities (-2.8%), networkers (-2.0%), paper stocks (-1.9%), biotechs (-1.9%), chemicals (-1.5%) and utilities (-1.3%).

Energy prices were lower: crude oil slipped to $68.98/barrel, gasoline to $1.99/gallon and natural gas to $6.89/mmBTU. The dollar rallied, pushing the dollar index up to 86.34. Gold and silver were lower: gold falling to $565/ounce and silver to $9.87/ounce.

BMB Note: Not a real good day at all. The market had a chance to make a move early, but that didn’t last long, and things deteriorated as the day went along, although the indices did finish off their worst levels. Volume was very light, but that doesn’t make up for lower prices.

Maybe the ‘bounceback’ rally that everyone has been expecting isn’t going to happen after all - no signs of it yet. On the long side, keep your money in your pocket. The short side looks like the best bet at the time (BMB did take a couple of small positions from the list posted earlier today once the market started to break this morning), and of course, keep tight stops just in case we get that follow-through from last week. But I wouldn’t count on that happening.

Impressive yields coming out of today’s T-bill auction, with the 3-month investment yield at 4.958% and the 6-month at 5.260%.

The NAHB survey of home builders dipped for the 6th straight month, and hit its lowest level in 11 years. That hasn’t been a big help for stocks today.

Gary Kaltbaum isn’t swayed - at all - by last week’s sharp rally. He says “this still looks like bear market action”:

Longer-term, the equation is simple. We are finding about 3 out of 10 stocks in good technical shape…and that is being nice. On top of that, we are down to a handful of sectors that are in uptrends. To be brief, they are , BEVERAGES, HOUSEHOLD PRODUCTS, MEDIA…and that’s about it. WORLD MARKETS continue to go for the ride. We are amazed at how deep the EMERGING MARKET’S drop has been. To make matters worse, the NASDAQ and NASDAQ 100 (NDX) remain below all resistance and moving averages. We mention this because these are the areas that normally lead the markets both up and down. It is also a big negative that the S&P 500 (SPX) remains below the 200-day moving average.

Lastly, the ugliest looking and MOST SHORTABLE charts are in the areas that had been doing the best. This includes the OILS, COMMODITIES and most BROKERS.

We can go on and on about how un-thrilled we are at this time. We completely disagree with the masses that this is nothing more than a normal correction. The average stock is much, much worse than the averages are showing. This needs to be respected. We will first need to get a follow through day starting with today…which is day 4 off the recent low. Even if one occurs, there is zero leadership in this market right now.

BMB can’t disagree. It’s hard to excited about much when so many charts are in such sad shape.

For those that may be interested - from the website of maket technician Martin Pring:

Every now and then Martin feels it’s necessary to inform our subscribers and web site visitors of the impending technical developments. Since the Bear may be knocking at the door, he has put together his bearish argument in a 28-page PDF and corresponding 30-minute web movie appropriately titled, “The Return of the Bear”.

The files are free for you to peruse and debate with friends and colleagues, and are located on our website, www.pring.com.

What looked to be a strong opening didn’t last long, and selling has taken over at least for the time being. The major indices are showing slight losses, and advance/declines lines, which started strong, have turned pretty negative. The group picture has also turned to the red, with commodity and energy related stocks leading the way down.

Bonds are drifting lower, yields slightly higher. Energy prices are also lower, the dollar is stronger, and precious metals are lower.

While literally hundreds and hundreds of stocks are offering short opportunities with bounces in their downtrends, I’m keeping an eye on a few that haven’t been beaten down quite as badly, and might be ready to join the rest of the market in the doldrums if the ‘bear phase’ catches the wind again. Here are a few symbols whose charts caught my eye over the weekend: BUCY, FMCN, NDE, NEW, NUE, PH, PJC, PKX, RACK, RBA, RTN, SAP, SGMS. But I’ll be waiting for a sign of resumption of the downward move in these stocks before making any moves.

These are not recommendations, only observations, and are based purely on price chart patterns. BMB does not own positions in any of these stocks.

Chris Johnson at Schaeffer’s sees some hints of change in sentiment, indicating that the worst of the selling might be subsiding for now. But the evidence isn’t entirely convincing, and may indicate continued short-term volatility ahead:

Wrapping it up, there appears to be enough bullish fodder in this week’s indicator activity to warrant some careful buying. Keeping with our Expectational Analysis approach, look for stocks that have remained technically strong and that show signs of investor pessimism. While the short-term trend appears to be to the upside, a larger-than-normal risk continues for the market until the remaining sentiment indicators show that investor pessimism is indeed unwinding.

Start keeping your eyes open for short candidates, but don’t be too anxious to jump in - wait for resumption of the downtrend, since we don’t how far this little rally goes. Deron Wagner’s advice this morning:

Our plan of action as we enter the new week is to view the current rally as both a chance to sell long positions into strength and initiate new short positions at low-risk price levels. If the major indices happen to break out above their downtrend lines, we can quickly cover any new short positions for small losses. But if the major indices fail the test of their downtrend lines and resume their six-week downtrends, we will have established short positions at prices that provide the optimum risk/reward ratio. Presently, we are positioned mostly in cash and taking a “wait and see” stance over the next few days…We are also stalking several of the broad-based ETFs for potential short entries if they fail the June 15 rally attempt, but it may be too soon to aggressively sell short right now without first seeing the confirmation of the trend resumption.