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.

I’m flipping through the channels tonight, trying to find something interesting to watch in the absence of any football, and I see there is NHL preseason hockey on.

Can you believe it? Baseball’s regular season doesn’t end for a couple of weeks yet (ok, you’re right, it’s really been over for most teams for a while now), football is just getting started, and we’re already playing hockey. Seeing as how the NHL season - if they actually have one, that is - ends in June, it seems that these guys don’t get a lot of time off.

And who wants to ice skate in the summertime anyway?

Over at TheDOCument.com, Deric has been keeping a pretty close eye on the precious metals for quite a while now. Today’s entry talks about the current decline in the gold price, what’s driving it down, and what could drive it right back up:

Gold and silver, which tend to rise with inflation expectations, both slumped heavily after the PPI report. If there is no inflation, there is no future in gold and silver, right? This typically linear mode of thought is what traps most traders. In fact, the housing report is what deserves more attention, not only because it is more accurate than the fabricated PPI, but because it has been housing which drove our economy over the last cycle, and it is housing that will lead it down. We are only in the beginning stages of what is likely to be a severe downturn. In a quarter or two, when the scale of the carnage becomes more apparent, people will panic, and the Fed will trash the dollar in an attempt to hold things together. Therefore, these dips in metals prices will prove in hindsight to have been an even better buying opportunity than 2001.

Before rushing to stock up positions, however, gold bulls should take time for a history lesson. In the 1970s, gold’s initial bullish surge saw the price nearly quintuple from around $40 to nearly $200 by the end of 1974. We all know that by 1980, gold’s run peaked at $850. However, few remember that after 1974, its price fell nearly in half, bottoming in 1976 at $110 before starting its next surge. A severe recession could spell a replay of that 1974-6 action, so caution and patience are warranted.

Yahoo hadn’t been doing a lot lately, as you can see, going sideways for the past month or so. But today changed that in a hurry. Big ouch. And the stock gave back nearly everything it had gained since the last big ouch, back in July.

Chart courtesy of StockCharts.com

The market struggled out of the gate this morning, with mixed reports coming out of the PPI and housing numbers. The Yahoo news hit tech mid-morning, and the news of a coup in Thailand didn’t help matters a lot, despite another two-dollar drop in the price of crude oil. Stocks battled back, and in the last hour, managed to push things back to near the zero line. Here are the final tallies:

Bonds had a good day, and yields were slammed down to test their recent lows:
6-month: 5.07%   2-yr: 4.79%   5-yr: 4.68%    10-yr: 4.73%    30-yr: 4.85%.

Market internals recovered late in the day from some pretty poor levels, but still finished in the red. Volume again increased on a down day, not helping give confidence to those waiting for the market to show more strength. Advances/declines were 4 to 5 on the NYSE and 2 to 3 on the Nasdaq. Up/down volume was 4 to 7 on the NYSE and 3 to 7 on the Nasdaq. New highs/lows were 88/44 on the NYSE and 70/62 on the Naz.

The group picture was negative as well, with only the airlines (+3.3%) enjoying big gains. Commodities got hit again, but they were not alone. Gold and silver stocks (-4.1%) led the move down, followed by semiconductors (-2.2%), commodity stocks (-2.1%), oil stocks (-2.1%), natural resources (-1.9%), oil services (-1.6%), housing (-1.6%), steel stocks (-1.5%), natural gas stocks (-1.5%) and internets (-1.1%).

On the energy front, crude oil got hit for another two bucks, falling to $61.66/barrel, and gasoling dropped to $1.50/gallon. Natural gas was higher by about a dime, to $5.03/mmBTU. The dollar index moved up to 85.94. Gold fell to $573/ounce and silver dropped back to $10.76/ounce.

BMB Note: Not a real good day for stocks. The energies gave back all of yesterday’s bounce, and tech staggered a bit on the Yahoo news. Things looked a little ugly in the morning, but held up as the day wore on. Not a reason to hit any panic buttons just yet.

Transports remain a bit of a mystery. They have gotten absolutely no help from the huge crash in oil prices, and I think that’s a concern. If the trannies can’t rally on the biggest drop in oil prices in years, what’s going to get them going? Especially since, as BMB noted a few days ago, they weren’t catching much of a bid as the retails bounced up either. So as the Industrials tease their May and all-time highs, the Transports can’t get much of a move off the lows. I think that’s a problem.

The market is having a bit of a struggle getting through resistance levels here, which isn’t a huge surprise. Up until today, much of the news that has come out has been good, as was today’s PPI. But the housing news continues to be bad, and Yahoo’s warning was a surprise that the market hadn’t accounted for. It might not be the last.

Fed meeting tomorrow. Don’t count on much change, either in rates or in statement. If there is a change in statement, it will certainly be interesting to see how the market reacts. I’d hold off on entering any new positions until after the Fed news is done and gone.

John Hussman remains very cautious despite the recent market rally, and is waiting for more technical evidence - in the form of better volume and advance/decline figures - that the move has sustainability:

…there’s presently no evidence in the quality of market action that investors have adopted a robust speculative mood. Good investments are those based not on hope, but on some foundation of evidence – either of reliable “investment merit” (based on properly normalized valuations), or of measurable “speculative merit” (based on the quality of market action). Taking a significant exposure to market risk without such foundations is like moving into a house built on sand.

***

In short, despite the enthusiasm about a “soft landing,” the recent advance has been selective and on deteriorating volume. This doesn’t suggest very strong investor sponsorship at present.

If the quality of market action improves, we’ll quickly shift our investment position by removing a portion of our hedges, but with neither investment merit from favorable valuations, nor speculative merit from favorable market internals, we remain defensively positioned. As frustrating as it can be to stand aside during a short-term market advance, we don’t have enough evidence to risk shareholder capital in a market lacking any reliable underpinning, other than an uncompelling hope that unusually wide profit margins will persist and that rich valuations will become richer if the Fed stays on hold.

Hat tip to At These Levels.

Chuck Jaffe hasn’t too many good things to say about the new US Oil Fund ETF (USO), calling it “not so much black gold as dark muck.”

Thanks to ETF Trends for the pointer.

A rough day for the homebuilders after the lousy data out this morning (what did people expect??). Many of those stocks are down 2-4% today.

The tech stocks, which had been leading the way up over the past couple of months, are taking a bit of a beating today. Here are some names that are all down more than 2% at the moment: YHOO, MXIM, GOOG, MRVL, NSM, EBAY, AMZN, AMAT, KLAC, ALTR, FSL, SMH, LLTC, QLGC, TXN, ADI, XLNX, AMD.

Yahoo warns that a slowdown in ad sales will have a negative impact on their third quarter results. The stock has taken an 11% plunge on that news.

Quite an interesting column by Paul Farrell this week.

Do you have a ‘bull brain’ or a ‘bear brain”? In either case, you are likely to be vulnerable to those illusions that fit your ‘pre-programmed’ notions:

Hordes of illusionists wait for you to enter their dark theaters. Whether bear or bull, they know your brain will automatically suspend it’s reasoning powers for the pleasure of indulging in a well-crafted illusion that fits neatly into your brain’s preprogrammed mindset of illusions:

• Bear brains. Seriously, it really doesn’t matter whether you have a bull brain or a bear brain. A month ago I reported that the economy had passed a “tipping point” and was collapsing into a bear market, a scenario similar to the 2000-2002 recession. Bears agreed, bulls objected. See previous Paul B. Farrell.
• Bull brains. Two weeks later, I reported on the opposite scenario, suggesting that 2007 might become a bull market, like 2003’s surprise bull market. But that was totally unacceptable to bears. One college professor said my report was “shameful stuff after all the doomsday forecasts of the past year.” See previous Paul B. Farrell.

The truth is, a bearish brain can only “hear” bearish predictions and growls at bullish ones. Visa versa with bullish brains. Brains are wired one way or the other. We screen out contrary facts and opinions. We only accept opinions that reinforce our preprogrammed illusions. Bull or bear, all investors are trapped in their cocoon of illusions, where economic predictions and market forecasts have far more power than any created by Hollywood’s best illusionists … and they’re far more elusive until it’s too late.

This part should come as absolutely no surprise at all. Economists are downright terrible when it comes to predicting the future:

Whether you are a bull or bear, optimist or pessimist, predicting the future of the economy is an impossibility, a total illusion. Listen to Sherden’s 10 findings in The Fortune Tellers:

1. The forecasting skill of economists is on average about as good as guessing. In fact, predictions by the politically driven Council of Economic Advisors, Federal Reserve Board and Congressional Budget Office were often worse than guessing.
2. Economists cannot predict the turning points in the economy. Of 48 predictions made by economists, 46 missed the turning points.
3. Economic forecasting accuracy declines with longer lead times.
4. No economic forecasters consistently lead the pack in accuracy.
5. No economic ideology consistently produces superior forecasts.
6. No economic forecaster has consistently higher forecasting skills predicting any particular economic statistic.
7. Consensus forecasts do not improve accuracy (although the press loves them).
8. Psychological bias affects forecasters and their forecasts. Some economists are naturally optimistic and bullish, others are consistently pessimistic bears.
9. Increased sophistication provides no improvement in forecasting accuracy. Remember the Long-Term Capital Management hedge fund? Two brilliant Nobel Economists backed by Wall Street’s elite nearly sabotaged the world economy.
10. Finally, Sherden says there’s no evidence that economic forecasting has improved in recent decades. In fact, forecasting appears to be deteriorating as partisan politics, Wall Street gaming and unpredictable global events invent new illusions.

And so my dear investors: “Nothing is as it seems” remains rule No. 1 when it comes to all economic predictions you rely on for your investment decisions. And the corollary? Rule No. 2: “All economic predictions will fail you.” Your best strategy, whether bull or bear, is to trust no one, and question all predictions, especially those your brain is convinced are “true.”

I guess we should just stick to using the ol’ crystal ball or tarot cards. Or maybe the magic 8-ball? You are keeping up with your charts of the moon and the stars, aren’t you?

Stocks are showing just a little more weakness than they did yesterday, but the major indices are hanging around the flat line. A/D lines are in the red, and more groups are lower than higher. The losers are led by homebuilders, gold stocks and steel stocks, while the few winners are led by disk drives and computer hardware.

Bonds got a kick out of the tame PPI report and weak housing data, and yields have been pushed lower once again. Energy prices are slightly higher, the dollar is mixed, gold and silver are lower.

A politician would lie about the economy? Can’t possibly be true…

I’m shocked.

Good news on the inflation front, as the August PPI came in at +0.1%, with the core rate falling 0.4%.

The news was not as good from the housing market, with housing starts dropping 6%, to a 3-year low. Building permits dropped as well, by 2.3%, to their lowest level since 2002.