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 last big rally in the market was on June 29th, the day the Fed announced a quarter-point rate hike, along with their statement on the economy, inflation and monetary policy. Today’s big rally came as Big Ben was making his appearance before Congress, talking about, what else, the economy, inflation and monetary policy.

Coincidence? I think not - looks a lot like another “Fed is done” rally to me. Will today’s rally fade away just as quickly as the June 29th rally did? We’ll find out soon enough.

Rob Hanna’s assessment of today’s action:

Why is it that buyers were in such a frenzy today? Was it the good news? You know, the fact that CPI came in high…er…I mean, the fact that the country’s lead economic policy advisor thinks the economy is slowing down. Hooray! We’re looking at slowing growth and rising inflation! Everybody in the pool!

These were not the reasons for today’s rally. In Monday’s column I discussed the fact that bear market rallies are extremely sharp because they are driven by fear: Fear of being caught short; Fear of missing the bottom; Fear of not being invested when the market is roaring higher. Today’s rally was not excitement induced. It was fear induced. Just like 6/15 and just like 6/29. Those were some impressive one-day rallies as well.

Is it possible the market has made a double bottom and this is the beginning of a new strong, bull-move? Sure. I just don’t see enough evidence to back that up. What I see is a series of fear-induced rallies similar to those that were frequent from March 2000 – March 2003, when the S&P 500 rose 1.75% or more about 70 times.

Let the others get excited about this one. If it is for real, it will be followed by leading stocks breaking out of sound basing formations and charging higher. There’s none of that, yet. Make sure your short-list is in order. There may be some opportunities soon.

Just in case you were starting to feel good about oil prices dipping down below $73/barrel: trading in the front month contract (August) ends tomorrow, and the commonly quoted front-month will change to the September contract — which came within a hair of $80 last week before falling to near $74 today, and is currently trading at $74.97/barrel. The September contract hasn’t traded below $70 since the first week of April.

The pundits are all sending bouquets of flowers to Big Ben Bernanke today for ’saving’ the market with his testimony today. Stocks rejoiced on the prospect of a pause in interest rate hikes, while the dollar went in the tank.

The Dow gained 212 points (+2.0%) to 11011, the S&P 500 jumped 23 points (+1.9%) to 1260 and the Nasdaq picked up 37 points (+1.8%) to 2081. The Russell 2000 moved up 21 points (+3.0%) to 702. The Dow Transports were higher by 2.0% and the Utilities gained 1.4%. Bonds also rallied, and sent yields lower: 6-month 5.27%, 2-year 5.11%, 5-year 5.02%, 10-year 5.05% and the 30-year 5.10%.

Market internals were solidly positive, and volume increased from yesterday’s levels, although volume probably wasn’t as strong as the bulls would like to have seen for a convincing turnaround. Advances/declines were 7 to 1 on the NYSE and better than 3 to 1 on the Nasdaq, with up/down volume 9 to 1 on the NYSE and 3 to 1 on the Nasdaq. New highs/lows were 71/36 on the NYSE and 42/82 on the Nasdaq.

Pretty much nothing but green in the groups, and the numbers were pretty solid: airlines (+5.4%), steel stocks (+5.0%), metals and mining (+4.5%), homebuilders (+4.4%), brokers (+4.1%), gold stocks (+4.0%), banks (+3.0%), computer hardware (+2.9%), retail (+2.8%), disk drives (+2.8%), HMOs (+2.8%), transports (+2.5%), software (+2.4%), health care (+2.4%), semiconductors (+2.3%), biotechs (+2.3%) and chemicals (+2.3%).

Crude oil fell for the third day in a row, dropping nearly a buck to $72.66/barrel. Gasoline dropped three cents to $2.24/gallon, but natural gas was higher by 30 cents to $5.86/mmBTU. The dollar was a big loser on the day, the dollar index falling to 86.49. The precious metals bounced back, gold moving back up to $642/ounce and silver back above $11 to $11.10/ounce.

BMB Note:

We can’t say we didn’t see this one coming. We’ve been expecting a bounce out of the oversold conditions, and typical of the bear market behavior, this one was big and sharp. Even though the CPI number wasn’t great, Big Ben’s words were apparently soothing enough to make everybody happy again.

Although today looked good, volume was a bit on the light side if you’re looking for something to change the overall landscape. Until proven otherwise, we’re looking at nothing more than a bear market rally. How far it goes and how long it lasts is anybody’s guess, but until it looks like something different than that, we’ll be scanning for names to add to our prospective short list for the next turn down. Of course, we won’t take action until it looks like that turn is underway - no sense in trying to pick the top of the bounce.

Intel, eBay, Motorola and Apple earnings all out after the bell tonight (I think). Should keep things interesting.

Update: Looks like we’ve got INTC down about 40 cents, EBAY up about a buck, MOT up 1.25 and AAPL up about 4 bucks from their closing prices.

As you see the Dow flirting with a 200-point gain today, remember what Rob Hanna had to say the other day:

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.

At this point, today looks like another of those sharp, bear-market rallies - the third one in just over a month. And all of them have been given back. I suspect that this one will be no different.

If you’re still holding stocks and have been waiting for a chance to lighten up, today may well be a good day to do so, assuming things hold into the close.

The headlines for the weekly petroleum inventory report from the Energy Information Administration of the Department of Energy usually just spew the inventory numbers, like these from this week:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) inched up by 0.2 million barrels from the previous week. At 335.5 million barrels, U.S. crude oil inventories remain well above the upper end of the average range for this time of year. Total motor gasoline inventories increased by 1.5 million barrels last week, and remain in the upper half of the average range. Distillate fuel inventories rose by 1.2 million barrels and are above the upper end of the average range for this time of year. Decreases in ultra-low sulfur diesel fuel and regular diesel fuel (15 ppm to 500 ppm sulfur) were more than compensated by an increase in high sulfur distillate fuel (heating oil) inventories. Total commercial petroleum inventories rose by 6.6 million barrels last week, and remain above the upper end of the average range for this time of year.

But there are a few more interesting tidbits in the report. Like the refinery data, for example:

U.S. crude oil refinery inputs averaged 15.9 million barrels per day during the week ending July 14, up 410,000 barrels per day from the previous week’s average. Refineries operated at 92.9 percent of their operable capacity last week. Gasoline production increased slightly last week compared to the previous week, averaging over 9.2 million barrels per day, while distillate fuel production declined, averaging over 4.2 million barrels per day.

And, if you’re a regular BMB reader, you know I like to take a look at the demand figures, which I find the most interesting of all - and probably the most useful in forecasting where energy prices are most likely to go in the tuture:

Total products supplied over the last four-week period has averaged 20.7 million barrels per day, or 1.7 percent less than averaged over the same period last year. Over the last four weeks, motor gasoline demand has averaged 9.6 million barrels per day, or 1.9 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 4.8 percent above the same period last year. Jet fuel demand is up 0.1 percent over the last four weeks compared to the same four-week period last year.

Demand continues to increase YOY. And that’s just U.S. demand. We’re not the only ones in the world guzzling these products - countries like China and India are just getting started. No matter what the media, the government, or anyone else tries to tell you, that indicates higher prices down the road. Get used to it - or start walking.

Let the bounce begin. As we suspected it might be, today looks like a day when things take off to the upside again. The major indices are sporting gains of about a percent-and-a-half. Advance/declines are way onto the green side of the page, and all of the groups are in the green - even the internets, with YHOO trying to drag them down with a loss of 19% on the day.

Bonds looked initially like they might be leaning toward higher rates, but with Big Ben babbling up on the Hill today, bonds have rallied and kept yields down. Energy prices are mixed after the weekly inventory report - crude and gasoline are lower again, but natgas is higher. The dollar has taken a tumble, as traders start to think that further rate hikes are no longer a lock. Gold and silver are higher.

Another not-a-huge-surprise number, as housing starts fell 5.3% in June.

Well, the beloved “core” rate let its supporters down today, as the headline CPI number came in at +0.2%, but the “core” - ex-food and energy - was even higher, at +0.3%. The headline CPI shows a 4.3% increase YOY, and the core is up 2.6% YOY. I don’t think those numbers are going to sit well with the Fed.

You’d think that if they’re going to go through all the effort to doctor up the CPI number to make it look good, they could have done a better job of lying.

I’m not sure the market is going to be real pleased with this one.