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.

The author of the “Technically Speaking, Market Analysis and Theory” blog is a gentleman by the name of Ron Sen, who also happens to carry the initials “MD” after his name. That combination is prone to producing departures like this in the midst of his market analysis:

First, a rant. You’ve probably heard about the Health Insurance Portability and Accountability Act - HIPAA. A patient was recently hospitalized at a neighboring facility and was told to follow-up with their primary physician (me). They had an important blood test the day before and I called for the result. First, the Medical Records told me they couldn’t release the information, and then the Laboratory told me that they could only release the information to the ordering physician (probably an intern), who told the patient to follow-up with me. I wasted a lot of time finding numbers and calling Quality Assurance, whom I assured that the treatment I was getting (the run-around) assuredly wasn’t quality. After a few hours they called back and verified that I wasn’t going to be using this test to take over the world or disenfranchise the patient, who, naturally wondered why I didn’t have the information anyway. That’s 21st century medicine, courtesy of our government, as in ‘we’re always here to help’. So, after six phone calls, the patient was able to get the information they needed. And by the way, physicians aren’t lawyers, so this kind of circuitous approach comes on our dime.

Barry from The Big Picture did a little experimental trading of the ProShares Inverse Qs ETF, and here’s his takeaway:

They are in sum better than mutual funds and their end of day closing prices; They are not nearly as useful as the Qs, Diamonds or Spyders. With the uptick rule exemption for ETFs, I am hard pressed to see why you would want to use these outside of retirement / tax deferred accounts.

First off, they are are rather illiquid; you couldn’t do a 10,000 share order easily.

Next, they trade with a fat 5 to 10 cent spread. The Qs are liquid as all hell, and if you could trade between the penny spread, I’d bet you would get executed.

3rd, there is an odd delay on the PSQs (Inverse Qs) relative to the markets. I got out within a nickel of the highs, and the market had long since reversed off the day’s lows. Thats a weirdness that will likely get corrected by some arbitrage relative to the index futures (theres some free money for someone right there). Indeed, the Nasdaq was briefly positive, and these were still up for the day.

Bottom line: A good product for hedging in accounts that either cannot short or use options; they are also superior to mutual funds, but inferior to shorting traditional ETFs.

I’ve been watching the ProShares funds, both the inverse and the ‘ultras’. Though I haven’t tried trading them, my observations would agree with Barry’s assessment. Maybe they’ll generate a little more volume down the road and become a better trading vehicle. For now though, the inverse ETFs will still be useful for ’shorting’ in a retirement account.

BMB mentioned a few times during the ‘big dive’ that commodities (not commodity stocks) other than the metals seemed to be holding up rather well. Crude oil, for example, never really faltered as the stock market and the metals were tumbling. DBC is the ETF that tracks the Deutsche Bank Liquid Commodity index, which is nearly 50% crude oil and heating oil, and about 10% gold. The remainder is made up of aluminum, corn and wheat - and corn and wheat prices have been rising of late, boosted by dry weather in many of the growing areas. DBC has now regained its 50-day MA, and is approaching the highs that contained it in April-May around 26.25. With crude oil, gold, corn and wheat all moving higher, it wouldn’t surprise me to see DBC break through that barrier. Disclosure: BMB owns shares of DBC.

Chart courtesy of StockCharts.com

The morning action was looking pretty sickly, but things firmed up and moved higher throughout the day, and the market managed to hold its own. The Dow managed a gain of 31 points (+0.3%) to 11135 - that’s about 106 points above the low of the day. The S&P 500 added 5 points (+0.4%) to 1273 - off a low of 1260 - and the Nasdaq closed with a gain of 12 points (+0.6%) at 2129, up from an intra-day low of 2096. The Russell 2000 made the same sort of turnaround, coming up 13 points of its low to finish up 5 points at 714 (+0.8%). The Dow Transports lost 0.1% but the Utilities were higher by 0.6%. Long bonds gained ground again, and yields moved lower on that end of the curve, but higher on the short end, distorting the yield curve even further: 6-month 5.29%, 2-year 5.16%, 5-year 5.07%, 10-year 5.10%, and 30-year 5.15%.

Have you noticed that the yield curve has now been inverted for a much longer period of time than it was a few months ago, but this time almost no one is talking about it?

Market internals turned around mid-day as well, working their way back into positive territoty, and volume also increased - so I guess that today will be registered an ‘accumulation’ day, even though the price gains weren’t very large, and the morning felt like anything but accumulation. Advances/declines were 12 to 7 on the NYSE and 5 to 4 on the Nasdaq, with up/down volume 6 to 5 on the NYSE and 3 to 2 on the Nasdaq. New highs/lows were 67/104 on the NYSE and 48/123 on the Nasdaq.

The turnaround helped more groups finish higher than lower, with the winners led by oil services (+2.9%), gold stocks (+2.8%), semiconductors (+2.6%), defense stocks (+2.5%), disk drives (+1.9%), natural resources (+1.4%), commodity stocks (+1.2%) and natural gas stocks (+1.2%). The had-been-flying-high airlines fell 1.5%, followed by the homebuilders (-1.3%).

Energy prices snuck higher once again, with crude oil climbing up to $74.16/barrel, gasoline up a penny to $2.19/gallon and natural gas up a couple of cents to $5.63/mmBTU. The dollar fell late in the day to move the dollar index down to 85.34. The precious metals had a big day, with gold up nearly 20 bucks to $643/ounce and silver up 50 cents to $11.54/ounce.

BMB Note: The market seemed to put in a bit of a ’save’ today. With the Nasdaq in trouble, the India bombings and not-so-great news coming out of Alcoa and Lucent, the morning wasn’t looking very good. As a matter of fact, BMB had his finger on the trigger looking to take a short position or two on the breakdown, but the market held. Later on, the market reversed and we even got a little spurt of buying - or maybe morning shorts reversing - going into the close. Hanging on for today at least.

Some of the beaten down techs got a reprieve today. The strongest areas remain the HMOs, REITs, utilities and consumer staples. A bit of a pop in some of the defense stocks today might get them moving a bit, and the gold stocks look like they could get another tick up as well. We’ll see where things go as the week goes on.

For today, the indices appear to have held off any immediate disaster, and the reversal during the day is somewhat encouraging. But its earnings season, anything can happen, and usually does. Keep your seat belts on and your eyes open.

Phil Flynn, in today’s Energy Report, says that he doubts that Iran will accept the terms of the offer in front of them, and that’s likely to keep oil prices high for a while. Oh, and note what he says about the Saudi story yesterday:

To be or not to be used to be the question. But today the question is will they or won’t they. Will Iran play ball and accept the EU proposal and their bag of goodies to stop their Uranium enrichment program or won’t they. Every oil trader in the world is waiting to hear the answer.

Deep down inside and despite yesterday’s sell off, I doubt Iran will go for the bait. I mean lets face it, if the world community can’t even come to an agreement on how to handle North Korea where a nut like Kim Jong Very-ill has blatantly and provocatively displayed his wiliness to shoot missiles towards wherever, why shouldn’t Iran chance it. More than likely the worse thing that could happen is Iran might get an even better proposal down the road or at least have a little more time to get an operational nuclear weapon. When the world community has no bite or backbone why take the offer when it is more than likely they will get a chance to cheat on a better deal in the future!

The more I think about the Saudi plan to try to use steam technology to drive out lower quality crude the more bullish I become about oil. Isn’t it kind of an acknowledgement by Saudi Arabia that perhaps the rumors about their depleting oil reserves could be correct? Just wondering.

What did BMB say about the Saudis yesterday?

Another poor start for stocks. The major indices are all in the red, and the Nasdaq 100 is fighting to stay above the June low of 1511.53 - hitting a low of 1510 this morning, but now holding around 1512. Advance/decline figures are poor, and only a few groups are in the green. Leading the decline are the airlines, paper stocks, networkers (hurt by a warning from Lucent), homebuilders, steel stocks, transports and brokers.

Bonds are slightly higher, yields lower. Energy prices are higher. The dollar is near unchanged, precious metals slightly higher.

Update: Notable new lows this morning: DELL, HD, IBM, LOW.

News reports are just starting to come in about explosions in India, in Mumbai’s financial district.

Update: CNBC says that police in India are reporting more than 100 dead in the bomb blasts.

Deron Wagner today, on the SOX and the Nasdaq:

Since the broad market formed its intermediate-term bottom on June 13, the S&P 500 has gained 3.5%, but the Semiconductor Index has fallen 4.3% since then. Notice how the $SOX failed to rally above its prior high along with the S&P at the end of June. That was a major sign of continued relative weakness in the sector, which explains why the $SOX quickly fell to new lows when the S&P pulled back off its highs over the past week. The basic law of relative strength states that sectors and stocks that fail to rally when the broad market does are always the first to fall on any subsequent weakness in the market…

As you may know, the direction of the $SOX is always important because the sector is so heavily weighted within the Nasdaq. Most of the time, the $SOX acts as a leading indicator for the direction of the Nasdaq, which in turn tends to lead the rest of the broad market. Unfortunately, the longer-term view of the $SOX is equally negative. Looking at the weekly chart, notice how the $SOX just broke below its October 2005 weekly closing low AND its 200-week moving average. Needless to say, this should be a major concern for the bulls.

Although the S&P and Dow are still holding up okay, the Nasdaq is starting to look ugly again and will inevitably begin to weigh on the other indices as well. The Nasdaq rallied 3.7% from June 29 through July 3, but the losses of the past several days have already caused the index to give back all of that gain.

…the Nasdaq has also fallen back down into its prior trading range from the latter half of July. This equates to a 61.8% Fibonacci retracement from its June 13 low up to the July 3 high. When an index retraces beyond this level, the odds of it significantly reversing back up are greatly diminished, but it could still happen if the Nasdaq doesn’t go any lower within the next several days. Any further weakness in the Nasdaq could result in significant downward momentum that would cause a test of the June 13 low. Obviously, the other major indices would have a difficult time bucking the trend if that happens. Remember that the S&P 500 is holding above its 200-day moving average by only four points.