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.

Why are guys like Hank Paulson, the new Secretary of the Treasury, willing to take government positions that pay a mere pittance compared to the hefty salaries they are pulling down in the private sector?? Bruce Bartlett may have the answer:

Last, but not least, among the reasons why an ultra-rich banker might want to be treasury secretary is a sweet little tax deal available only to high-level government executives: a one-time, tax-free capital gains exemption. Given Paulson’s reported wealth, this tax deal could save him $100 million in taxes — nice compensation for a job that will last two years at most. Nice even by Wall Street standards.

This provision, Section 1043 of the Internal Revenue Code, was enacted during the George H.W. Bush administration. It was needed, he said, because too many wealthy people were turning down high-level appointments because they didn’t want to pay the steep capital gains taxes when they sold their assets to comply with government ethics rules.

Hat tip to Ivan Martchev at At These Levels.

Rob Hanna remains bearish, and after today, can you blame him??

I am not seeing buying enthusiasm in important areas. I am not seeing breakouts with strong follow-through in individual issues. Disappointing earnings, especially in tech, could really make things ugly. I remain bearish. I continue to believe the major indices will make new lows. Defense and capital preservation are the primary goals in this environment. Nimble traders can play short-term opportunities to scratch out some gains.

LED maker CREE, closed at 22.59, trading at 17 in the after-market after warning.

Yuk.

So much for any excitement coming out of yesterday - those hopes faded quickly this morning. Sellers took the market down again today, dragging the Dow back down 122 points (-1.1%) to 11013. The S&P 500 fell 14 points (-1.1%) to 1259 and the Nasdaq got tagged for a 39 point loss (-1.8%) to 2090. The Russell 2000 lost 13 points (-1.9%) to 701. The Nasdaq 100 fell to its lowest level in a year at 1501. The Dow Transports dropped 1.5% and the Utilities fell 0.8%. Bonds wandered around and went pretty much nowhere, leaving little change in yields: 6-month 5.29%, 2-year 5.17%, 5-year 5.08%, 10-year 5.11%, and 30-year 5.14%.

Market internals were pretty lousy. Another technical ‘distribution’ day was avoided as volume came up short of yesterday’s levels - but it sure felt like one. Advances/declines were just better then 3 to 7 on the NYSE and 5 to 14 on the Nasdaq. Up/down volume was near 1 to 4 on both exchanges, while new highs/lows were 63/119 on the NYSE and 49/103 on the Nasdaq.

The group picture was even a little more dismal, with only the REITs and oil services managing to stay just above the flat line. Techs helped lead the way down once more: disk drives (-2.8%), homebuilders (-2.8%), semiconductors (-2.8%), computer hardware (-2.7%), retailers (-2.5%), networkers (-2.4%), computer tech (-2.3%), brokers (-2.2%), internets (-1.8%), paper stocks (-1.7%) and software (-1.4%).

Energy prices ticked up: crude oil tagged the $75 mark and finished at $74.95/barrel, gasoline was up 7 cents to $2.26/gallon and natural gas climbed 15 cents to $5.78/mmBTU. The dollar held most of its early gains, and the dollar index moved up to 85.90.

BMB Note: Not good. Not good at all. If that’s all that we get for follow through on a nice reversal like we saw yesterday, I’d hate to see what would happen if things get really bad.

Let’s review: the Dow and S&P have been pretty firmly rejected at their declining 50-day MAs, and have been sliding for more than a week now. I suppose you can put a positive spin on those two and say that they haven’t yet given back ALL of their gains from the big June 29 rally, but they’re close. And not only are they drifting downward - they’re chopping around too. The S&P has changed direction 7 of the past 8 sessions.

As for the Nasdaq, pretty gross. Today the $COMPQ finished at its lowest close since the June 14 reversal day. The Nasdaq-100 ($NDX) is even worse, putting in what looks to be a new 52-week low today. Ugh.

So here’s the deal: there are still some groups holding up, and if you’re staying in stocks, by all means, stick to those areas: REITs, HMOs, utilities, consumer staples. Many of the energy, and some of the commodity, stocks have firmed up as well, so they’re looking relatively good here - oil stocks, for example. You can also stick with the various commodities and commodity-based ETFs that are doing well - BMB owns both USO (oil) and DBC (various, 50% energy). Gold (GLD) and silver (SLV) are also still strong.

Avoid tech stocks like the plague - they look pretty infected right now.

Otherwise, cash is still looking very attractive. Rates aren’t moving much at the moment, but money markets are still paying well and the 6-month T-Bill went out at more than 5.3% on Monday.

Every week, the financial media waits breathlessly for the Dept. of Energy’s crude oil inventory report, and ponders how energy prices will react.

To me, the inventory data isn’t the most interesting part of the release. Looking a little further into the summary, we get to the real heart of the energy issue, and that is whether or not demand for petroleum products is continuing to rise or not.

For example, here is the ‘meat’ paragraph from this week’s report summary:

Total products supplied over the last four-week period has averaged over 20.8 million barrels per day, or 1.6 percent less than averaged over the same period last year. Over the last four weeks, motor gasoline demand has averaged nearly 9.6 million barrels per day, or 1.7 percent above the same period last year. Distillate fuel demand has averaged over 4.1 million barrels per day over the last four weeks, or 3.3 percent above the same period last year. Jet fuel demand is up 0.8 percent over the last four weeks compared to the same four-week period last year.

For the second week in a row, we have a four-week period where supply of products has decreased, but demand for products has increased. That, folks, is why we continue to see higher energy prices.

Once again, we see zero follow-through to yesterday’s reversal. This morning’s action has given back all of yesterday’s gains, and advance/declines figures are pretty red, along with the group action. The worst off are the homebuilders, computer hardware and semiconductors - the semis being the group that led yesterday’s bounce. This isn’t very encouraging.

Bonds are slightly lower, yields sneaking up. Energy prices have moved very little despite the morning inventory data report. The dollar has been strong all morning, and the precious metals have given back some of their early gains.

Deron Wagner is watching the DBC and GLD ETFs, and has this to say on yesterday’s rebound in the semiconductors:

Just as quickly as we showed you how the Semiconductor Index ($SOX) had fallen below its 200-week moving average, it snapped back above it in yesterday afternoon. Sudden strength in the $SOX was certainly a major reason for the broad market’s late days reversal. The $SOX recovered all of its previous day’s losses and then some by rallying 3.3%. Of all the industry sectors we follow, it was the top percentage gainer yesterday. Nevertheless, there is no technical reason to begin buying semiconductor stocks unless your time horizon is very short and you are capable of selling into strength while maintaining tight stop losses. Although the semis may see a few days of follow-through momentum to the upside, there remains a lot of overhead supply within the sector. When the market reverses, you should focus on stocks and ETFs that were showing the most relative strength when the broad market was weak. These, as opposed to stocks and ETFs near their lows, are usually the ones that make the biggest gains.

The Nikkei was down in Japan, but the Hang Seng was higher and India’s Sensex index was up more than 3% a day after the bombings. European indices are slightly higher.

Oil is up, the dollar is higher, and gold is up - more tension in the Middle East as Israel crosses over the Lebanese border after two more soldiers are kidnapped.