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 couple of days of strong action have some people changing their view of the market. Rob Hanna is one of them:

The market has had two impressive days in a row now. Breadth has been good, price movement has been good, volume ok, and resistance levels have been breached. I am also starting to see some stocks break out on the long side. I have been bearish for a long time now, but it’s starting to appear as if the market disagrees with me. When the market and I have a difference of opinion, I listen to the market. Therefore, my trading bias has now moved from bearish to neutral. I still am not convinced that we have the makings of a strong move up. I still believe the June/July lows will be breached sometime this year. But a rising market must be respected.

…That CMGI is still trading around 4 million shares a day? I guess a lot of people stay interested in has-been stocks when they’re trading between 1 and 3 bucks.

Lucent (LU) knows all about that…

If you’re going to be off chasing the Nasdaq breakout of the past few days (blue box), make sure you stay on your toes. Keep in mind what happened to the breakout back in June (red box).

Chart courtesy of StockCharts.com

HPQ - closed at 34.43, trading at 35.90
NTAP - closed at 32.39, trading at 31.15
MRVL - closed at 20.66, trading at 19.65

Who’duh thunk it. Two big up days in a row, and this from a market that looked like it couldn’t hold a gain if its life depended on it.

Stocks rallied again on another supposedly tame inflation number, and got some help from the bond market and a drop in crude prices. That left the major indices looking to break free of their trading ranges. Here’s how things ended up, as the Nasdaq led the way for the second straight day:

Bond prices rallied again, and pushed yields to their lowest levels since April:
6-month: 5.15%   2-yr: 4.88%   5-yr: 4.80%    10-yr: 4.86%    30-yr: 4.99%.

Market internals were healthy, and volume increased again over yesterday’s levels - giving us a couple of higher volume “up” days, something we haven’t seen in a while. Advances led declines by 3 to 1 on the NYSE and 2 to 1 on the Nasdaq, with up/down volume 4 to 1 on the NYSE and 5 to 1 on the Nasdaq. New highs beat out new lows on both exchanges, by 150/35 on the NYSE and 89/75 on the Nasdaq.

Lots of green in the groups, with only the utilities (-1.0%) and energy stocks showing slight losses. Leading the move on the upside were the semiconductors (+4.3%), steel stocks (+3.7%), airlines (+3.6%), housing stocks (+3.4%), networkers (+3.3%), metals and mining (+3.2%), disk drives (+3.2%), transportation (+2.8%), computer hardware (+2.8%), biotechs (+2.7%) and internets (+2.5%).

Energy prices fell, with crude oil sliding more than a dollar to $71.89/barrel, gasoline slipping a penny to $1.98/gallon and natural gas falling 11 cents to $6.77/mmBTU. The dollar got smacked again, pushing the dollar index down to 84.89. Gold was up a few bucks to $628/ounce and silver rose to $12.26/ounce.

BMB Note: So we’ve had a couple of nice up days on better volume - is it time to jump back in? Are you gonna miss out on the bull run? I’m sure the market would like you to believe that, and it could very well be true. However, two good days don’t completely wipe out all of the bad charts, and make up for the 4 big reversal days out of the 7 previous. But the move has certainly been good enough that it must be respected.

So what do we do? Well, there’s a reason why I don’t give out stocks picks here. Sometimes, I don’t have any idea what to do, and sometimes what I do turns out to be quite wrong - both of which have been the case quite a bit recently. I’m still a little skeptical of the rally, but part of that could be that I’m skeptical of just about everything. The other part is that I’m a little concerned about getting suckered in, only to get the door slammed in my face in another few days.

I’m not particularly comfortable with a market that is rallying in the face of poor underlying fundamentals - a deteriorating housing market, slowing economy, inflation that exists but is buried under the rug and an inverted yield curve that is getting worse by the day. But the market does what it wants to, and sometimes it will just do it without me, whether I like it or not. And it’s time like these when I think of the line that is credited to Linda Raschke - that the market will do the obvious thing in the least obvious way. This current move, in my mind, is NOT the obvious thing…

So I’ll watch from the sidelines for a while, and see how things play out during and after this options expiration week. If things hold up and some opportunities come along that I like on the long side, I’ll give them a shot. But something tells me not to go diving into a market that has just had two big up days, seemingly out of nowhere, and I’m definitely not going to try to run and catch up with a tech train that already has a bunch of stocks up nearly 10% in those two days. I’ll leave those for you guys. Have at it.

HPQ earnings after the bell…

The highlights of today’s inventory report from the EIA:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell 1.6 million barrels compared to the previous week. However, at 331.0 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 2.3 million barrels last week, and are in the lower half of the average range. Distillate fuel inventories increased by 0.8 million barrels, but remain above the upper end of the average range for this time of year. A large increase in ultra-low-sulfur diesel fuel more than offset a large decrease in regular diesel fuel (15 ppm to 500 ppm sulfur), while high-sulfur distillate fuel (heating oil) inventories inched lower by 0.3 million barrels. Total commercial petroleum inventories increased by 1.2 million barrels last week, and remain above the upper end of the average range for this time of year.

Refineries are operating at 91.5% of capacity, and demand growth is still outpacing supply growth:

Total products supplied over the last four-week period has averaged nearly 21.1 million barrels per day, or 0.3 percent more 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 1.7 percent above the same period last year. Distillate fuel demand has averaged over 4.0 million barrels per day over the last four weeks, or 3.5 percent above the same period last year. Jet fuel demand is up 1.1 percent over the last four weeks compared to the same four-week period last year.

The initial rush to push things higher has quieted down, but the market is still holding on to slight gains at the moment. The A/D lines have pulled back quite a bit from their early high levels, but are still well into the green. The positive action is seen across all the groups, with metals, gold stocks, airlines, oil services and steel stocks leading the way.

Bonds are rallying yet again, and have pushed yields to their lowest levels in month. The 10-year sits at 4.873%, and that leaves us with one ugly looking yield curve:

Energy prices are mixed following the weekly inventory report, with crude and gasoline lower, but natgas higher. The dollar has taken another hit after the CPI report, and gold and silver are both higher.

Good ol’ Abby Joseph Cohen is on CNBC again, giving her target for the S&P of 1400 by the end of the year. Keep in mind that she has been wrong every year since 2000, yet they still keep asking her as though her opinion matters.

Lemme see - 1400 would be up another 10% from the 1280 range we’re in now, and we haven’t seen 1400 since November of 2000. I’m thinking Fat Chance.

Don’t listen to these people.

Gary Kaltbaum, in his column this morning: “Before Tuesday’s action, the market experienced four negative reversal days where the market gapped up on “good news” and failed. The fifth time was the charm.”

So is the market off to the races? Well, not necessarily:

That leads us to our canned line: Every bull market has started with a follow-through. But not every follow-through has led to a bull market. And yes, June’s follow-through day failed miserably. The bear market of 00-03 had many failures.

We would not go out and buy with abandon. If this is the start of something big, leadership will show up. Start gathering a list of stocks that bucked the trend of the past three months and look for high volume breakouts.

Other technical notes:

As you know, we are big believers that the NASDAQ-types lead both up and down. It was the NASDAQ breakdown that made us call a top for the market on May 11. It is nothing but a positive that for this second, the NASDAQ-types are starting to outperform. Both the NASDAQ and NDX did move above their respective declining 50-day moving averages for the first time since the top. Of course, you can say the same thing for the all-important SOX.

The lagging small and mid-cap indices have held their recent lows. This also is a good start…but will need to see better action out of them.

The Dow and S&P are again nudging up against resistance…in fact, some strong resistance. It should get interesting with any move up from here.

The July CPI shows a headline reading of +0.4%, and a core rate of +0.2%. That figure has pre-market index futures moving higher.

Housing starts fell 2.5% in July, and June’s reading was revised downward as well. Builing permits are at their lowest level in four years.