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.

Rob Hanna gives advice on how best to survive in the bear market environment, and describes some important differences in how a bull and bear market behave:

Bear market environments do not act as mirror images of bull market environments. Turning a graph of a bull market upside down is typically not a good representation of how a bear market will act. This is because they rule by different emotions. Bull markets rule by greed. Bear markets rule with fear.

Fear is more powerful and causes sharper reactions. It is also pervasive. It is not only what causes the market to trend lower, but it is also the emotion that rules the rallies. Rallies in bear market environments are especially fierce. People who are short become afraid of losing all their profits and are forced to cover as the market begins to bounce. Additionally bottom pickers rush in for fear of missing the bottom. Many times these rallies are sharp enough to temporarily take out resistance levels in stocks and indices. This tends to fool many investors and technicians. To profit in an environment that is susceptible to such sharp, short-covering rallies, traders need to be willing to shorten their time frames and take profits more readily.

Tomorrow morning we get the PPI report, and Wednesday morning brings the CPI. Also, Big Ben will be making an appearance on Capitol Hill. Fed and inflation will be in the headlines the next couple of days, along with a flood of earnings reports.

Deric at TheDOCument.com is back from vacation, and has a little to say on the media and their constant search for a ‘reason’ behind every day’s stock movement:

The intense selling of the last few days is likely due to nervousness over these reports. Writers at most large financial news organizations are blaming the weakness on the Lebanon-Israel conflict, but these reporters are only working in their usual mindless manner of taking top headlines and ascribing market action to the news. Do people really think SanDisk shares have fallen 25% this month because of problems in the Middle East?

Civil charges should be coming soon in the options backdating scandal. I’ll be surprised, and even more disgusted than I am already, if we don’t see some criminal charges down the road.

Stocks couldn’t get much going today, as there was very little, if any, evidence of a bounce waiting in the wings. The major indices finished near flat, but market breadth leaned to the negative side. The Dow picked up 8 points (+0.1%) to 10747 while the S&P 500 dropped 2 points (-0.1%) to 1234. The Nasdaq gained less than a point and finished at 2038. The Russell 2000 was a better measure of the market’s bias, dropping 4 points (-0.5%) to 678. The Dow Transports fell 0.4% and the Utilities were higher by 0.2%. Bonds were mixed, and yields were mostly higher, but lower on the 30-year: 6-month 5.26%, 2-year 5.11%, 5-year 5.04%, 10-year 5.07% and 30-year 5.10%.

Market internals were mostly negative, but volume levels slipped. Advance/declines were 8 to 11 on the NYSE and 7 to 12 on the Nasdaq, with up/down volume 2 to 3 on the NYSE but 10 to 9 on the Nasdaq. New highs/lows were 24/162 on the NYSE and 29/211 on the Nasdaq.

A few groups managed to eke out small gains: disk drives up 1.0% and telecoms up 0.7%. The losers were concentrated in the energy/commodity areas: oil services (-4.4%), gold & silver stocks (-3.4%), steel stocks (-3.4%), natural resources (-3.0%), commodity stocks (-2.9%), oil stocks (-2.8%), metals and mining (-1.8%), natural gas (-1.6%).

Energy prices moved lower, with crude oil dropping to $75.30/barrel, gasoline to $2.29/gallon and natural gas falling hard to $5.78/mmBTU. The dollar strength continues, with the dollar index now at 86.98. Gold and silver both stumbled today, gold falling more than 20 bucks to $643/ounce and silver getting smacked down to $10.88/ounce.

BMB Note: Not much of a bounce in stocks, and the strong energy areas got whacked, as did many of the commodities themselves. I have no clue.

Today’s action doesn’t help us much in deciding what to do. I’m assembling the list of stocks that I’ll be looking to short if/when we get a bounce, but we have to wait for that to happen before getting in. Right now, sitting on my hands seems to be the safest course of action.

Sticking with the cash theme…

Looking at the results of the Treasury’s T-Bill auction today, we see a slight bump up in the 3-month rate, from 5.056% last week to 5.098% this week, but the 6-month investment yield of 5.297% is down a tad from last week’s 5.313%.

Even Herb Greenberg is doing it:

On Kudlow & Co. last Friday, Larry turned to me and asked something like, “Herb Greenberg…what the best defense investment?” I think he was thinking more about plays on defense companies. “Larry,” I responded, “Nothing beats 5 ½% cash.”

I couldn’t help myself. Everyone else on the panel, with the notable exception of Raymond James’ exceptional strategist, Jeff Saut, was talking as though the market’s recent malaise was merely a mild interruption of a bull market.

No idea if they’ll ultimately be right, but I can say this: I put my money where my mouth is. My entire 401-K and a good deal of my IRA are in cash – as they have been, I confess, for quite awhile. (Sorry to sound so boring, but aside from my Dodge & Cox Balanced Fund, the Olstein Financial Alert Fund and my recent purchases of the Grizzly Fund and the Ishares Comex Gold Trust, which replaced two funds that had grown by more than 40%, I ladder CDs and enjoy watching interest rates rise on money market funds holding the rest.

I’m not alone: Bob Rodriguez, president of the FPA Funds and manager of the FPA Capital Fund, is 45% in cash. I know hedge fund managers who say they are rolling Treasuries, keeping an arsenal to use for firepower for the right time. “With the risk-free rate of return at over five percent – waiting out the current correction’s Perfect Storm seems to be a low risk strategy as the return of capital trumps investors’ desires to achieve high returns on capital,” says hedge fund manager Doug Kass in his column for TheStreet.com’s Street Insight.

The folks at Schaeffer’s are keeping a close eye on longer term support for the major indices, as determined by their 20-month moving averages:

As a general rule, the technical bedrock for any bull market can normally be found at the 20-month moving average of the S&P 500 (SPX – 1236.20) and the other major indices. This line of demarcation between long-term bull and bear markets often serves as staunch support for ailing markets before giving way to bear market selling. For the second time in as many months, the SPX tested this long-term support level last week as the market reeled at the news of Middle East fighting and accompanying higher oil prices. On Friday, the SPX traded a few points below the “bedrock,” which is now located at 1,232 and change before some buyers asserted themselves late in the session, leaving the benchmark index above this important support for now…

With the market appearing to be at a crossroads, the prudent investor will find it worth the wait to see if long-term support holds for the SPX and other major indices. I’ll remind everyone that the last time the SPX moved below its 20-month moving average was in November 2000. During that period, the Nasdaq Composite (COMP – 2,037.4) moved below its 20-month one month before the SPX and Dow Jones Industrial Average (DJIA – 10,739.3), so I’ll also point out that the COMP closed below its 20-month trendline last month. With market technicals appearing to erode and sentiment pointing to investors who are apparently not in a bottom-picking mood, the only catalyst left for stocks appears to be earnings, which swing into peak season this week with more than 30 of the Nasdaq 100 stocks reporting this week. But keep in kind that geopolitical concerns can trump earnings, such that earnings can do more damage (if they disappoint) than good (if they exceed expectations) since the positive impact will be muted by outside events.

The major indices have given up much of their early gains. Advance/declines still in the red, and more groups down than up. Not a real healthy start to the week. Disk drives and paper stocks are higher, but steel stocks, oil services, gold stocks, oil stocks and natural resources are lower. Bonds are drifting lower as well, with yields moving up a bit.

Crude oil prices are still pulling back from Friday’s high levels, but are holding above $76/barrel. The dollar is continuing its move higher, while gold and silver are struggling.

Gary Kaltbaum looks at the leading economic index, and the current charts. Ugly stuff. On the markets:

That leads us into the markets. We need to repeat our thoughts about last week’s action….and we think it is an important lesson about markets and news. There should be no doubt that the market was helped along this week by the news out of the Middle East…no doubt at all. BUT…and listen carefully…if this market was starting a new bull….let’s say 3 weeks ago…the market would have gone down for a bit and then turned back up. We think it is important you learn lessons from the past. When London was bombed, markets went down for a few hours…and then rifled back up. Why? We were still in a bull move. When we were hit by 9/11, markets fell in unison for days in the emotion of the tragedy…and then turned back up with a monster rally. Why? Because the market had already gone way down and was due to turn up. This bear market did not start this past week. For the major indices, it started on May 11…and as we have suggested all the way down, we believe we are just in the early innings. Bear markets do occur! We are always amazed at how so many refuse to realize that bear markets are a normal course of business in the markets. Bear markets do not last weeks. Garden variety bear markets last months…or longer. Please keep this all in mind. It is very important.

Nothing good to say looking farther out but shorter-term could be another story. Shorter-term, all major indices are very extended to the downside which could lead to a violent bounce. We are not saying it will happen. We are saying conditions are such that it could happen…especially if we get some good news out of the Middle East. Go back and look at the previous charts. Notice how stretched they are from their moving averages at this time. The last time the markets were this stretched to the downside was when markets started their last bounce on June 14th. The reason for the bounce was to work off the extended condition to the downside. We may get some of that now. That said, earnings come out in droves this week…which will definitely change the playing field for many stocks. As well, news out of the Middle East is going to be fluid. So stay on your toes but recognize the forest from the trees. The forest is the overall market…BLAH! The trees are the bounces. A major downtrend is in place right now and should be respected. We are of the belief that the markets talk. You had better listen.