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.

Larry McMillan, in The Option Strategist Weekly Updater (sign up here):

The bulls have had all the news go their way, but they haven’t done much with it. Both last Friday, when the unemployment report was announced, and then this Tuesday, when the Fed decided to pause in their rate-raising, bulls poured into the market immediately afterward. However, they were quickly sent scattering when large numbers of sellers showed up. $SPX actually traded above 1280 five different times and above 1290 once (actually trading at its highest price since May). However, it has not been able to close above 1280 even once! This has all the earmarks of the bulls expending their energy just to keep prices level. The bottom line is that the 1280-1290 resistance area on $SPX has held rather convincingly.

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In summary, we don’t really have any recent buy signals ($VIX and breadth are stale buy signals). Moreover, with $SPX unable to break through overhead resistance, and the generally negative season of late August - September approaching, we are taking a bearish view of things. In addition, $SPX is now approaching the longest time in history (well, in the history of the S&P 500 anyway) without at least a 9% correction. While we realize that fact is not a timing indicator, is does show just how little selling has been done since 2003. Unfortunately, when this much bullishness is packed into the market, the release of that bullish energy is swift and nasty.

You know, watching the market the last few weeks has been a lot like watching a soccer match. You watch and you watch, and things go back and forth, and back and forth. But nobody ever seems to get anything accomplished - other than going back and forth, of course.

In the past week, we’ve seen a lot of the ‘back and forth’ take place intra-day. But in the last couple of days, we got the ‘forth’ yesterday, and the ‘back’ today:

Bond prices slipped, and yields snuck higher:
6-month: 5.19%   2-yr: 4.97%   5-yr: 4.91%    10-yr: 4.97%    30-yr: 5.10%

Market internals were a little uglier than the major indices might indicate, but volume was again pretty anemic. Advance/declines were 7 to 12 on the NYSE and 1 to 2 on the Nasdaq, with up/down volume about 3 to 8 on both exchanges. New highs/lows were 42/78 on the NYSE and 37/146 on the Nasdaq.

Some sizeable losses in a few groups today, and nothing to speak of on the up side. Taking the brunt of the hit were the airlines (-5.0%), steel stocks (-3.8%), gold and silver stocks (-2.4%), semiconductors (-2.3%), transportation stocks (-2.2%), HMOs (-1.5%), paper stocks (-1.3%) and housing stocks (-1.2%).

Crude oil and gasoline recovered a part of yesterday’s losses: crude gained 35 cents to $74.35/barrel and gasoline was up a nickel to $2.05/gallone. Natural gas fell about a quarter to $7.27/mmBTU. The dollar index moved up to 85.48, while gold slipped a bit to $634/ounce and silver tumbled to $11.44/ounce.

BMB Note: Chop chop. Chop chop. The market doesn’t seem real strong here, but there isn’t enough push in either direction to get anything going. The S&P has closed between 1263 and 1280 every day since July 25th. Sooner or later, that tight range will give way and volatility will pick up, but it’s impossible to know in which direction. And you might get a head fake first.

Under the surface, many areas are still in pretty bad shape. The small and mid cap indices are back to teasing their June and July lows, even though the Dow and S&P seem to be hanging by their fingernails near the top of their ranges. The Nasdaq and Nasdaq 100 are also back near their lows. Many sectors/groups still look horrible: transports, semis (along with most other techs), biotechs, defense, housing, retail. In order for the market to improve, not just a few but MANY of these areas will have to get their act together, and I don’t see that happening real soon. Maybe they’ll surprise us - and we’ll need to see some volume come back into the game as well.

Until that happens, we have no choice but to remain defensive.

An update to our earlier post featuring Phil Flynn’s comments on the phase-out of the current NYMEX gasoline contracts (root symbol HU):

The complete phase-out of MTBE in gasoline will also lead to the conclusion of trading for a more than two-decade old futures contract.

The New York exchange plans to terminate the New York Harbor gasoline futures contract at the end of the year, according to Anu Ahluwalia, a spokeswoman at NYMEX.

That contract has been trading since December of 1984, she said. An alternative contract was introduced in October of last year.

New York Harbor reformulated gasoline blendstock for oxygenate blending, or RBOB, features physical delivery in the New York Harbor area for blending with 10% denatured-fuel ethanol.

It’s ‘like your basic gasoline — before you put in the additives,’ explained Flynn.

The purpose of the RBOB futures contract is to ‘replace’ the unleaded-gasoline contract, he said, adding that they’re ‘trading side by side right now.’

The last New York Harbor gasoline futures contract month to be traded is January 2007, said Ahluwalia, and delivery for that contract would be in late December of this year.

Both gasoline futures contracts currently trade on the trading floor and NYMEX expects the transition to the RBOB contract from the old gasoline contract to be ’smooth’ with the ’same players in the ring,’ she said.

‘The market is going to dictate what happens. Right now we’re offering both,’ she said, adding that the market will decide what type of gasoline to use and when.

What’s strugging in the market today??

Airlines - CAL, LCC, AMR, UAUA, LUV, JBLU and LSTR all down more than 3%.
Tech - ADI down 16.5%. NSM, SMH, BRCM, EBAY, AMD, AMZN, MOT, MRVL, NVDA, SNDK, TXN, LLTC, ALTR all down more than 2%.
Metals - AKS, NUE, OS, ATI, TIE, CLF, X all down more than 3%.
Gold and Silver stocks -AUY, GFI, AEM, GOLD, NEM, GLG, PAAS, SLV, MDG all down more than 2%.

And the indices have slipped a bit more, just now hitting new lows for the day.

Is this just a mirror image of yesterday? Very light volume, and little price movement, the difference being that the bias is to the downside this morning. Major indices showing slight losses, A/D lines in the red, along with most groups. Airlines are getting socked pretty good, with steel stocks, semis, transports and HMOs following them down. Nothing on the upside to speak of.

Bonds are a little lower, yields up. Energy prices are still trying to figure out what to do: crude flat, gasoline up a few cents and natgas a little lower. The dollar is mixed. Gold and silver each up slightly.

Phil Flynn tries make sense of the selloff in the energy complex yesterday:

Oh sure you have the argument that air travel would falter as travelers and consumers would cower in fear and lose their confidence. Yet if that was the entire explanation then why did gasoline lead the rout late in the session. You might think that gas demand would actually improve as those afraid to fly would take to the roads. Unless they feared that terrorists might be targeting their Ford Explorers.

And if this sell-off was all about terror, why was it left to the oil complex to bear the brunt of the of the market’s terror fears. Why did airline stocks and the general market recover yet the energy complex alone was left to carry the burdens of the world? The answer is that despite the fact the initial rout was started by terror it was other fundamental and technical factors that led to the collapse.

The oil market this week surged on oil lost from Prudhoe Bay but got great news when it was reported that Shell oil was again beginning to flow at a key oil pipeline which could increase supply by 180,000 barrels of oil a day. That news came as hopes were being raised that perhaps it was actually possible that BP might not have to completely shut down its operations at Prudhoe Bay. Yet this still does not explain why gasoline led the way down.

No doubt about it gasoline got crushed and it had to do more with the fact that the unleaded gas is a lame duck contract. The phase out of the additive MTBE in gasoline has led to the phase out of the Nymex’s unleaded gas contract as well. Traders have traded the contract with the realization that the contract would be no more as of January. An announcement came that Goldman Sachs was reducing their exposure to gasoline seemed to put a real crisis of confidence in the unleaded gas market over all.

Masood Farivar of Dow-Jones reported that Goldman Sachs won’t roll the remaining unleaded gasoline futures contracts in its Goldman Sachs Commodity Index. The GSCI will not have any exposure to unleaded gas futures by the end of November according to current plans. This partially explains why the gas market has been so weak with the inventory and demand numbers so strong.

What we are seeing being played out is the swan-song for our old friend the New-York harbor unleaded gas contract.

In Deron Wagner’s eyes (and BMB’s), very little has changed in the market picture:

Looking at the daily charts, yesterday’s action did little to change the technical picture of the broad market. The S&P 500 recovered to close back above its 200-day moving average, but only by a nominal amount. Our bias going into today remains neutral on the short-term, but bearish on the intermediate-term. In the near-term, we may continue to see a lot of choppy and indecisive action as the bulls and bears battle it out. The past few days of choppy intraday action are indicative of this. But in the intermediate-term, one can only conclude that the broad market remains in a steady downtrend. Until the downtrends in the major indices are broken, along with the confirmation of higher volume, there is no reason to get excited right now. Consider trailing stops tighter on your short positions, and monitor a list of potential long positions, but we basically consider the market to be in a holding pattern right now.

Retail sales surged in July. That’s good right? No so fast - even though the market got a pause in Fed hikes, they’re still pretty Fed-phobic:

The retail figures were at odds with the Federal Reserve’s forecast for a slowdown in growth, said Robert Brusca, chief economist for FAO Economics.

Futures dipped on the report and the market has opened a little lower.