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.

• Information blackout in Iran, where police are supposedly smashing satellite dishes. Up until now, the dishes were officially banned but were tolerated. Just in time for the end-of-August showdown with the U.N., right? Or maybe they’re paranoid about the upcoming NFL season.
• I never thought I’d see the day when a bunch of celebrities took a stance that made some sense. You watch, tomorrow hell will freeze over - and really throw the global warming crowd for a loop.

Hat tip to the guys at Power Line.

You don’t have to read the article if you don’t want to - but check out the charts of the bear market rallies that took place during the 1929-1932 and 2000-2003 time periods.

For example - during the ‘29-’32 bear market, there were counter-trend rallies of “32%, 27%, 14%, 13%, 23%, 28%, 35%, 21%, and 24% within a 3-year period”. Wow. Some roller coaster.

Martin Goldberg makes the case for a repeat of the election rally of ‘04.

Deric at TheDOCument.com, on the recent rally:

…The point is that I believe this week’s rally is nothing more than a reaction within a bear market. Any student of market history knows that bear markets are littered with violent counter-rallies, especially near the beginnings and ends of major downswings. I also believe that once this reaction runs its course, equities will fall harder and longer than during the May to July swoon.

When this counter-rally began, I wrote that the upswing would last long enough to instill great confidence in the bulls while making bears feel they had been duped once again. With so many bears, including myself, feeling giddy after Monday’s reversal, it should have been apparent that the trap had not fully sprung. Now that we are feeling pain, I believe the next inflection point may be near.

More surprises lie ahead. As the next downswing ensues, bears burned by this rally will be quick to take profits or happily get out even on currently losing positions. Bulls will hold fast believing that all will be well, bolstered with memories of this rally. The surprise for both sides at that point will be a market that just won’t stop falling.

Time will tell if he’s right.

DELL - closed at 22.80, trading at 21.85
JWN - closed at 36.50, trading at 35.49
FMCN - closed at 62.55, trading at 59.45
ADSK - closed at 34.99, trading at 32.90
AMD - closed at 24.20, trading at 23.40
MRVL - closed at 20.48, trading at 18.95

Stocks wandered up and wandered down today, didn’t make a lot of progress, but didn’t give up much ground either. With the exception of the energies and metals, most groups held up pretty well.

The major indices didn’t manage to add a lot to their big gains of the last couple of days, but they did manage to finish just in the green. However, the transports and utilities took small losses:

The bond market held yields fairly steady:
6-month: 5.17%   2-yr: 4.90%   5-yr: 4.81%    10-yr: 4.87%    30-yr: 5.00%.

Market internals were again positive, with volume pulling back just a bit from yesterday’s levels. Advances led declines by 6 to 5 on the NYSE and 8 to 5 on the Nasdaq, with up/down volume 5 to 4 on the NYSE and 5 to 3 on the Nasdaq. New highs outpaced new lows for another day, at 118/34 on the NYSE and 105/64 on the Nasdaq.

Groups were split, with energy stocks and commodities getting the short end of the stick. Winners included brokers (+1.4%), software (+1.3%), biotechs (+1.1%), internets (+1.0%) and homebuilders (+1.0%). Leading the losers were steel stocks (-2.1%), gold and silver stocks (-2.0%), oil services (-1.8%) and commodity stocks (-1.1%).

Energy prices fell for yet another day, as crude oil took a dive of nearly 2 bucks to $70.06/barrel. Gasoline fell a nickel to $1.93/gallon (time to go fill up the truck), and natural gas dropped to $6.69/mmBTU.

BMB Note: The market held its ground today, and again got a little help from falling oil prices. Many of the energy stocks are looking pretty shaky here, so that’s an area I’d stay away from for right now. Maybe they’ll get it back together if oil prices firm up. Big moves down in names like FTO and VLO today. Be careful there.

Other than that, it was a pretty solid consolidation day. If the market can put together a few more days like this without showing signs of trouble, that would be good news for the bulls. Some firming up here, and maybe some light volume pullback could provide some long opportunities.

Don’t forget, tomorrow is options expiration, so there will be some attempts to push things around a little - or attempts to hold them where they are. Volume will likely be higher than normal as well.

Dell earnings after the bell tonight…

Oil prices have slipped quite a bit over the past week. What’s changed? Well, not very much, really. And if Phil Flynn is correct in his explanation of the lower prices, we shouldn’t come to expect them - except maybe once a month:

Slip sliding away and the stops were falling like flies. It was a technical washout in the futures arena as oil hits a seven week low even after what some may say was a somewhat supportive EIA supply report. Why the big slip? Was the sell off about gasoline demand that slipped last week but over the four week average is still a record high? Perhaps it was the soothing words of Iran’s Foreign Minister who said that Iran is ready to discuss with the European Union the suspension of its atomic activities.( Oh don’t you feel all warm and fuzzy now?) Or perhaps it was about the fact that the Prudhoe Bay bareley caused a blip in our nation’s crude oil supply. Supply that, by the way, seems to be at least in the short term more than adequate. Or maybe it because OPEC, those cagy prognosticators of future oil demand, lowered its oil demand outlook for 2006 by 80,000 barrels to 84.5 million barrels because of a potential slowdown in the world’s largest economies.

Yes indeed the sell-off was because of all of that and more! More you ask? Yes More. The market also got hit with another case of the contango bang-o! That’s right the contango bang-o! Did you already forget what the contango bang-o is? As we get close to expiration we usually have a big bang of a sell-off. Well it something we have seen develop month after month as we get closer to the expiration of the crude oil options and futures. Today is the expiration of the September crude oil options and this is not the first time since the market has traded in contango that we seem to have a large sell-off on or near futures and option expiration. In fact it seems to be a regular thing going all the way back to last year. It seems that as we get closer to expiration there is a release of fear and terror premium out of the contract and if the pattern continues as it has in the previous months, we should soon bottom and start to move higher again. It seems the lows for the oil are set around contract expiration and then the market resumes its rally.

Pretty much a consolidation day thus far, with the major indices all hugging the flat line. The A/D line on the NYSE is also flat, but the Nasdaq A/D is in the green. Groups are split, but not many big numbers. Homebuilders lead the winners, oil services the losers. Bonds are only slightly higher, keeping yields down.

Energy prices are all lower. The dollar is mixed, gold and silver lower.

Most of the folks that follow IBD / O’Neil’s discipline are calling Tuesday’s move a very late “follow-through” day off the lows of mid-July.

Here’s the definition of a “follow-through” day again, from “How to Make Money in Stocks”, third edition:

Starting on the fourth day of the attempted rally, look for one of the major averages to “follow through,” meaning it shows a booming 2% or more gain on heavier volume than the day before. This tells you the rally is much more likely to be real. The most powerful follow-throughs usually occur on the fourth to seventh days of the rally. Follow throughs after the tenth day may indicate a positive but somewhat weaker new uptrend.

A follow-through day should give the feeling of an explosive rally that is strong, decisive and conclusive, not begrudging and on the fence, barely up 1%. The market’s volume for the day should be above its average daily volume in addtion to always being higher than the prior day’s trading.

While I agree that Tuesday’s move certainly felt like a powerful follow-through day (never mind that it came on day 21), the volume was actually quite light, and I don’t think it came close to being “above its average daily volume” - although it was slightly higher than the day before. Now we did see much better volume yesterday, but that’s not the way the ‘rules’ work…

Tim Truebenbach is skeptical about this rally’s ability to last:

Since the follow-through came on the 21st day of the rally, it’s important to be very leery of its success. With very few names to go after and a rocky start to the rally, it may be a good idea to wait for further confirmation. For example, if stocks continue setting up in weeks to come we may have a true, bona fide rally underway. On the other hand, if more distribution creeps in, we may just have a market rising until everyone sees a price they wish to sell into.

The latest market moves have gotten Gary Kaltbaum’s attention as well. But he urges patience and discipline:

As I have told you for years, the NASDAQ-types lead the market up and down…and it was a positive that the NASDAQ was starting to lead again. I will repeat, I do not know what this will lead to, but accumulative action is now being seen and it must be respected. Keep in mind, the best action has been reserved for names like QCOM, BRCM and others that have been absolutely bludgeoned over the past few months…some down over 50%. While these areas move faster than others, there will be a rebuilding process. I am already receiving too many emails from people who were fearful on Monday but greedy on Wednesday. So…relax! The market will be open today and tomorrow. I promise. If this is for real and long-lasting, leadership will show up, bases will form and more and more stocks will break out on volume. Just play it one day at a time. Here are a few lines out of Investor’s Business Daily. It will explain exactly how I feel right now. Please pay attention to the words in italics.

“Technology stocks were a big reason the Nasdaq and smaller stocks rallied. The Philadelphia semiconductor index soared 4.3% as chipmakers finished as one of the day’s top industry groups. Transportation stocks also fared well as crude oil futures settled at a nearly one-month low. While those and other areas are leading the market, be judicious in what you buy. Tuesday’s Big Picture cautioned that some follow-throughs can go nowhere. Many top-rated stocks are in risky late-stage bases. Avoid deep bases or those with severe selling. Make sure fundamentals are solid. Disciplined trading can keep investors away from distressing situations. If technology is where leaders are emerging, there aren’t abundant opportunities so far. Few chip stocks are near buy points. Most of the high-liquidity names are just now coming off lows or still building the right side of their price bases.“