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.

A great post today over at TheDOCument.com. Here’s Deric on the Toll Brothers con-call this morning:

Toll Brothers also became another in a long list of home builders to have now reduced their current-year forecast twice.

A quote given by Robert Toll during the earnings conference call is worth noting:

“It is the first downturn in the 40 years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors. Instead, it seems to be the result of an oversupply of inventory and a decline in confidence: Speculative buyers who spurred demand in 2004 and 2005 are now sellers; builders that built speculative homes must now move their specs; and nervous buyers are canceling contracts for homes already under construction. The resulting excess supply has exacerbated the drop in consumer confidence, which first appeared last September, that was already a drag on new-home sales.”

I don’t know about you, but to me, that seems like an awfully good description of a bubble bursting. The decline of housing is an economy-wide event with direct implications on the consumer. Cisco’s report, even if its numbers can be believed, is more likely company-specific. Nevertheless, bulls took the Cisco news by the horns and renewed their hopes of a second-half spending boom.

And on the day’s action:

The early action saw yet another battle over the 1280 region on the S&P. The bulls attempted to instigate a short squeeze by rapidly pushing the index above that disputed level. Then they ran out of steam and ultimately got caught in a bull squeeze. Equities headed straight down through the remainder of the session, exiting just above the low of the day. I expect tomorrow to be bloody.

Bulls have an innate tendency to always be bullish, even in the face of defeat. The light they saw today was not a product of sudden lucidity, but rather that bright light leading the bull market to its afterlife.

Yesterday we looked at the chart of the Dow Transportation index, which was slammed for another 3% loss today. As we see by this chart, the airlines have not been a great deal of help to the transports.

Chart courtesy of StockCharts.com

Wow. We need to talk.

The market went flying out of the gate again today, with Nasdaq / tech stocks making a bid to try to pull the market higher. But by mid-morning, the Dow had pulled back to even. The S&P approached the flat line early in the afternoon, and the Nasdaq, which had been up some 37 points and fallen back to plus-20 or so, began to deteriorate with about 90 minutes left. By the time the smoke had cleared, there was nothing left standing. And when it came to what was happening in the Transports - I could hardly stand to watch.

Let’s look at the final numbers. A BMB reader had a good suggestion the other day, and that was to try make the day’s numbers a little easier to read at a glance, rather than burying them in text like I have been. I thought it sounded like a good idea, so I’m going to try a new “tabled” approach:

Bond prices drifted a little lower, moving yields up a bit:
6-month: 5.14%   2-yr: 4.91%   5-yr: 4.85%    10-yr: 4.94%    30-yr: 5.05%

Market internals were mostly negative, and the Nasdaq tried to hold up its side of things. Volume increased again over yesterday’s Fed-day levels. Advance/declines were 8 to 11 on the NYSE and 7 to 12 on the Nasdaq, with up/down volume 7 to 12 on the NYSE but 11 to 8 on the Nasdaq. New highs/lows were 107/95 on the NYSE and 42/174 on the Nasdaq.

Tech stocks led the way early, but were not able to hang onto all of their gains, and the gold & silver stocks (+2.2%) passed them by to grab ‘best’ group of the day, followed by networkers (+2.0.%), internets (+1.7%), paper stocks (+1.2%) and computer tech (+1.1%). A few big numbers on the losing side of things, with airlines down 4.0%, followed by housing stocks (-3.3%), transportation (-3.2%), brokers (-2.2%), retailers (-1.7%), defense (-1.4%) and banks (-1.3%).

Energy prices were mixed. Crude oil pulled back from above the $77 mark late in the day to finish at $76.35/barrel, gasoline slipped to $2.17/gallon and natural gas climbed to $7.65/mmBTU. The dollar index was all over the place but finished back where it started at 84.73. Gold was up a few bucks to $649/ounce and silver moved back up to $12.44/ounce.

BMB Note: Alright, listen up. This is no time to try to find glimmers of hope in a lousy market. We said on Friday that the big reversal looked like it could be the top of this latest move up. Yesterday’s reversal / poor reaction to the Fed announcement solidified that view, and today’s huge reversal pretty much clinches it IMHO.

Good markets don’t have the Dow up 77 points in the morning only to finish down 97. Good markets don’t send the Nasdaq up 37 points in the morning and bring it back to zero at the close. Good markets don’t have the transports already down 15% from the top, and then send them down another 3% in one day.

This market looks to be getting into some rather serious difficulty again. It’s up to you how you want to handle it, but if you’re still long, I would recommend you pick your stop points and honor them if hit. The ‘bear phase’ that began in May has not yet ended, and must be respected.

The recent poor action indicates to me that we are likely entering another period of lower prices. How low they go and how long it lasts remains to be seen. But above all, you need to be aware of what is happening and be prepared to get out of the way, however you see fit. There are times when you can have fun buying stocks and making money, and there are times when you need to protect your butt. This time would be the latter, as it pretty much has been for going on three months now.

Ignore at your own risk.

Former executives of Comverse Technology (CMVT) have been charged with criminal fraud in another of the backdated options cases.

Good.

Strange days.

The tech stocks still have the Nasdaq up by more than a percent, while the Dow has pulled all the way back to flat. Gold stocks and energies are joining the techs in having a good day, but homebuilders and transports are getting smacked.

Splitsville.

Oh, and let’s not forget crude oil trading at $77.17/barrel.

The headline numbers for petroleum inventories show drawdowns in all three areas:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell 1.1 million barrels compared to the previous week. However, at 332.6 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 fell by 3.2 million barrels last week, and are in the lower half of the average range. Distillate fuel inventories decreased by 0.2 million barrels, but remain above the upper end of the average range for this time of year.

Refineries are still humming along above 90% capacity:

U.S. crude oil refinery inputs averaged 15.6 million barrels per day during the week ending August 4, up 92,000 barrels per day from the previous week’s average. Refineries operated at 91.6 percent of their operable capacity last week. Gasoline production increased last week compared to the previous week, averaging almost 9.2 million barrels per day, while distillate fuel production remained relatively unchanged, averaging over 3.8 million barrels per day.

And despite all the whining about higher prices, it doesn’t seem to be having much of an effect on gasoline demand:

Total products supplied over the last four-week period has averaged over 20.9 million barrels per day, or 0.1 percent more than averaged over the same period last year. Over the last four weeks, motor gasoline demand has averaged over 9.6 million barrels per day, or 1.8 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 5.8 percent above the same period last year. Jet fuel demand is down 1.2 percent over the last four weeks compared to the same four-week period last year.

The market filled up the bucket again this morning, but that small leak in the bottom of the bucket is letting those early gains drip way once again. The major indices are still showing slight gains, and the Nasdaq is still up nearly 1%, helped by bump up in Cisco on earnings. Advance/declines have pulled back to less than half what they were early.

Most groups are still in the green - we’ll seee how long that lasts. Right now, it’s mostly tech that is higher: networkers, internet, semis, software and telecoms. On the down side we find the homebuilders and transportation stocks.

Bonds are slightly lower, pushing yields up. Energy prices are higher, as the weekly inventory numbers didn’t do much to help ease concerns there. The dollar has fallen back from a move up overnight. Gold and silver are both higher.

Following up on a comment I made on an earlier post, Deron Wagner recommends the Ultra Short S&P ETF (SDS) in his column this morning.

Gary Kaltbaum isn’t real excited about the market’s chances here - and he points out the critical support levels that you should be keeping an eye on.

The market found a spot on Friday where sellers said “fuggedaboutit”. We have taught you throughout the years that these types of negative reversals end moves to the upside and lead to downside testing. Due to the fact that all the major indices aborted at or near important resistance levels, we think you should give the reversal some respect.

The Fed did its yapping…but for us, it is NOT THE NEWS, IT’S HOW THE MARKET REACTS TO THE NEWS. Firstly, we believe it is cause for concern that on the recent move up, volume never confirmed the move. History shows that volume needs to be part of the equation on any move up…and so far, nothing doing. In addition, while the “market” has been moving up the past couple of weeks, we continued to see a ton of stocks blowing up…including some past leaders of the last bull cycle. This is not the type of action normally seen if we are at the start of a new bull. In addition, while the DOW and S&P did best on the move, SMALL-CAP, MID-CAP and the like continued to under perform. What did we tell you at the top? In bear phases, money runs from riskier areas into the larger-cap areas…because of their liquidity. So far, this is exactly what is happening and is not a positive like some believe.