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.

From TheDOCument.com today:

An interesting article appeared on CNN Money today describing how home foreclosures swelled in August, particularly in the previously hot areas of Florida and California. The data, published by RealtyTrac, showed that nationwide foreclosures spiked by 24% compared to July and 53% compared to last August. In California, the number of foreclosures is up 160% from last year! The blame for the increase lies in the re-pricing of monthly payments associated with ARMs.

What should scare homeowners and traders alike is that we are only just beginning to feel the effects of the ‘adjustment’ factor of adjustable-rate mortgages. There are a half trillion dollars worth of ARMs set to adjust higher for the remainder of 2006 and four times that amount in 2007. It is hard to imagine a scenario where both the consumer and the banks that lent to them do not come under serious pressure over the next 12 months.

The media is having a great time slamming the “peak oil” theory with this ammo from the president of Saudi Aramco:

The world has tapped only 18 percent of the total global supply of crude, a leading Saudi oil executive said Wednesday, challenging the notion that supplies are petering out.

Abdallah S. Jum’ah, president and CEO of the state-owned Saudi Arabian Oil Co., known better as Aramco, said the world has the potential of 4.5 trillion barrels in reserves - enough to power the globe at current levels of consumption for another 140 years.

Never mind that this comes from the head of a company that hasn’t been able to find a new major oil field in their own country for the better part of 50 years or so.

Never mind that this gentleman has absolutely no idea where any of this ‘untapped’ oil might be, what it might take to get it out of the ground, or how much that process might cost.

Never mind that this statement could be utterly and totally false - let’s make sure it gets on the front pages.

Granted, it very well could be true. Shouldn’t we ask the guy for maybe a little bit more evidence?

Pigs can fly too. Have I ever seen one? Well, actually, no. But there is the potential…

Just remember: they scoffed at “Hubbert’s Peak” back in the 50s… and he was dead right on U.S. production.

	Oil prices have been falling for a month now, but the struggling transports took until the last couple of days to catch a little wind. The $TRAN looks to have put in at least a near-term bottom here.
	The brokers, after looking like they could break through support around 207, have come through with a big save this week.

Charts courtesy of StockCharts.com

Rebounds in the energy and commodity areas, along with strength in the brokers and the transports helped push stocks higher again today, leaving the Dow and S&P back within reach of their May highs:

Bonds were only slightly higher, and bumped yields down only a bp or two:
6-month: 5.07%   2-yr: 4.80%   5-yr: 4.70%    10-yr: 4.76%    30-yr: 4.89%.

Market internals were positive again today, but volume pulled back from yesterday’s levels. Advances/declines were 13 to 6 on the NYSE and 12 to 7 on the Nasdaq, with up/down volume about 7 to 3 on both exchanges. New highs/lows were 186/28 on the NYSE and 125/46 on the Nasdaq.

The majority of the winners were from the commodity areas: oil services (+3.1%), steel stocks (+2.8%), brokers (+2.4%), natural resources (+1.9%), transportation (+1.6%), natural gas stocks (+1.5%), oil stocks (+1.4%), commodity stocks (1.4%), networkers (+1.1%) and retailers (+1.0%). The semiconductors led a short list of losers, falling 0.8%.

The free-fall in crude finally took a day off, with oil up 21 cents to $63.97/barrel. Gasoline still dropped another penny to $1.55/gallon, and natural gas slipped to $5.45/mmBTU. The dollar index drifted a little lower, to 85.85. Gold was higher by a couple of bucks to $590/ounce, and silver recovered a bit to $11.11/ounce.

BMB Note: Another relatively strong day for the market. Though many of the gains came from the beaten-down energy and commodity areas, there were no big losers. The ‘market’, at least as measured by the Dow and S&P, seems determined to make a run at those May highs, which would be 11670 on the Dow and 1327 on the S&P. That will be a rather critical time, and we’ll have to watch how those indices react, since the Nasdaq, Russell, mid-caps and small-caps have much more ground to cover before they get near their spring highs.

You can add the transports and brokers to the groups of yesterday that made strong moves, but we did see a little giveback in some of the tech names today. If all of these groups can pull it together and hang on after these moves, maybe the market has a chance to make more of a run here. We’ll have to see how things play out. Options expiration weeks have generally been good for the market of late, and it looks like this week will be no exception. The key for the end of this week and into next week will be the return of more economic data: tomorrow we get import/export prices and retail sales, CPI on Friday, PPI and housing starts on Tuesday.

Feel like you missed out on the ‘big’ August run-up? Frustrated because you’ve had trouble making money, even though the market has been rising since mid-July?

Well, don’t feel too bad. According to this post at Ticker Sense, you’re not alone - the hedge funds weren’t having that good a time of it either:

According to Hedge Fund Research Inc, not one major hedge fund strategy outperformed the S&P 500 during the month (of August). In theory, hedge funds are supposed to provide steady and consistent returns, so if they underperform during a strong month, it is not necessarily such a bad thing. However, no one likes to get a statement or letter that says they were only up 1% when the market was up more than twice that.

And one fund at Goldman Sachs got caught on the wrong side of a trade or two:

…one of the company’s largest funds, which manages $10 bln in assets for its most elite clients, fell nearly 10% during the month, equating to a loss of $1 bln.

BMB mentioned in yesterday’s wrap that the drop in oil prices isn’t necessarily good news over the longer term - if it is indeed a sign of a slowdown in economic activity worldwide.

In his nice review of possible/probable reasons for the latest market rally, Barry Ritholtz quotes Greg Ip of the WSJ:

The falling price of oil also may be an ominous sign if it reflects decreased global demand, which would indicate decreased economic activity. The International Energy Agency yesterday revised down its forecast for oil demand growth world-wide this year, “largely due to revisions to North American preliminary data, flat consumption in Europe, and continued demand sluggishness in the Pacific.”

Barry adds some caution of his own:

So before you break out the noise makers and champagne, understand the context of this price drop. Even the fall in gold implies a whiff of deflation, coming on top of so much Fed induced reflation and inflation.

Inventory numbers out this morning show a drawdown in crude, flat levels in gasoline and an increase in distillates:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell 2.9 million barrels compared to the previous week. However, at 327.7 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 inched higher by 0.1 million barrels last week, and remain just above the upper end of the average range. Distillate fuel inventories rose by 4.7 million barrels, and are well above the upper end of the average range for this time of year. Most of the increase was in ultra-low-sulfur diesel fuel inventories, while high-sulfur distillate fuel (heating oil) inventories rose by 1.4 million barrels.

Refineries are operating at 93.0 percent of capacity (do you hear of any new refineries being built? me neither), and the YOY demand numbers don’t seem to be going down. And if prices moderate for a while here, that demand isn’t likely to slack off any…

Total products supplied over the last four-week period has averaged over 21.2 million barrels per day, or 0.9 percent more than averaged over the same period last year. Over the last four weeks, motor gasoline demand has averaged nearly 9.5 million barrels per day, or 2.4 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 3.2 percent above the same period last year. Jet fuel demand is up 1.0 percent over the last four weeks compared to the same four-week period last year.

The market hasn’t been able to get much going yet this morning, and the major indices have drifted slightly into the red, with A/D lines right around flat. Slight bounces coming in the oil services and metals stocks, and pullbacks in the homebuilders and semiconductors.

Bonds are up slightly, keeping yields down. Energy prices are near flat, as are the dollar, gold and silver.

Just not a heck of a lot going on here at the moment…

Deron Wagner recognizes the apparent strength in the homebuilders, but cautions that the major indexes may be facing some overhead resistance:

Yesterday’s gain in the Nasdaq was impressive because it enabled the index to erase all of its losses from the September 6 and 7 “distribution days.” As mentioned earlier, it also did so on higher volume than both of those sessions. Looking at the chart below, you will see that the Nasdaq closed above is prior high from September 5, but the 200-day moving average now looms overhead. It’s anyone’s guess as to how easily the index will overcome its 200-day MA, assuming it even does, but this pivotal resistance level provides a good reason to be cautious with new trade entries in this vicinity.

As we have been mentioning all along, the S&P 500 has much less overhead resistance than the Nasdaq and is only one percent off its multi-year high. Obviously, a breakout to a new 52-week high would be extremely bullish for the S&P 500, but resistance of a prior high also provides a good excuse for traders to sell into strength. Because of the key resistance areas that both the S&P and Nasdaq are approaching, don’t become complacent! Yesterday’s session definitely showed a lot of bullish momentum, but just remember that none of the indices are at their 52-week highs and therefore still must contend with varying degrees of overhead supply.

Gary Kaltbaum sees near-term lows in areas like housing and transportation, and is encouraged by continued good action in the semis:

We cannot find anything bad about the action the past two days. The more areas that bottom, the better. There is still a clear lack of growth leadership breaking out but if this positive action continues, we gather we will get some.

Time will tell.