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.

Ike Iossif, in tonight’s market wrapup at Financial Sense:

This week the major indices did take advantage of the “bullish set-up.” The Dow and the SP rallied 1.4%, and NASDAQ rallied 1.8%. Coming into this week there is still a bit of room left to the upside–roughly 0.5% to 1.0%. Ultimately, however, the indices will have to deal with the multiple negative divergences. Investors who are not very familiar with technical analysis may wonder what causes the negative divergences and what they mean. Negative divergences of the magnitude and nature we have observed during the latest rally are caused by its “narrowness.” The rally has been very selective with most issues failing to participate. For example, although the Dow made new highs, the Transportation Index, the Mid-caps, the Russell 2000–just to name a few–have failed to do likewise. Usually when a new bull move starts we see wide participation right at the very start. It is very, very rare for a new bull move to start narrowly and widen later on. Consequently, past history suggests that the latest rally is more likely the “end of something” instead of the “beginning of something.”

Heard on Gary Kaltbaum’s radio show today:

“The most risk is always going to be in the areas that had the biggest moves up already, and everybody’s talking about ‘em, and then you get sucked in at the most inopportune time — and then you don’t know what hit you. That’s your commodities (recently), that’s your technology and internet in 1999. And I promise you, there will be plenty more.

Your job is to make sure it never happens to you — if you miss something, it’s OK!   What’s not OK is you jumping on top of the pile, after the run, and burying yourself.”

	A rough day for the gold bugs. BMB has been keeping an eye on the precious metals, wondering when might be a good time to step in. I think I’ll be waiting for at least a break of the downtrend.
	Tread lightly around the semiconductors here. The uptrend off the lows has been broken, and the $SOX teased a bit of a breakdown today. Resistance in the form of the 200-day MA is still overhead.
	A big decline in the volatility of Google since the year began. Will the volatility pick back up again? And if so, which way will it break?

Charts courtesy of StockCharts.com

The Dow-centric rally continues, and the big-cap index finally sets a new intra-day and closing high. But the Dow gave back quite a bit in the last hour, and had the CNBC anchors sweating that high close, and even had Bob Pisani with his hands together, “praying” that the index would hold on to set the new closing high. How sick is that?

But hidden behind all the Dow hype was a pretty mediocre day for the market as a whole, and a downright disastrous day if you’re still long commodity stocks. The major indices finished mixed - check the BMB Note at the end of this post for more on that - with the Transports leading the way on a big drop in oil prices:

The bond market was pretty quiet most of the day, and yields didn’t move much:
6-month: 5.01%   2-yr: 4.66%   5-yr: 4.56%    10-yr: 4.62%    30-yr: 4.76%.

Market internals were pretty evenly mixed, with volume increased over yesterday’s levels. Advances/declines were just better than flat on the NYSE, but a negative 4 to 5 on the Nasdaq. Up/down volume was again just below flat on the NYSE, but just above the flat line on the Nasdaq. New highs/lows were 138/55 on the NYSE but 67/86 on the Nasdaq.

The groups were split, with the red numbers quite a bit bigger than the green ones. On the winning side, we find airlines (+3.1%), retail (+1.8%), brokers (+1.2%), transportation (+1.1%), internets (+1.1%) and networking (+1.0%). Leading the losers were gold and silver stocks (-6.3%), oil services (-4.4%), natural resources (-3.7%), oil stocks (-3.6%), commodity stocks (-3.4%), steel stocks (-3.0%), natural gas stocks (-2.6%), hospitals (-1.7%) and semiconductors (-1.1%).

Energy prices were mixed: though crude oil got smashed for more than two bucks, sending it down to $58.68/barrel, and gasoline was a nickel lower at $1.46/gallon, natural gas snuck up by more than a dime to $5.76/mmBTU. The dollar index was up slightly to 85.73. Gold and silver joined oil in the dumper, with gold falling to $575/ounce and silver dropping to $10.80/ounce.

BMB Note: All hail the Dow. New all time high. Whoopee. I’ll buy it a beer.

Ok, now that that’s out of the way, let’s talk about the things you won’t hear Katie Couric tell you on the evening news tonight. Here are a few things that stood out for me today. On a day when the Dow was up 57 points, and set new intra-day and closing highs:

• The S&P was up less than 3, Nasdaq up 6. Neither index even got above yesterday’s high, let alone last week’s.
• The NYSE composite ($NYA) lost 13 points, or 0.1%.
• The mid-caps ($MID) lost a quarter percent. The Russell ($RUT) and small-caps ($SML) were flat.
• The NYSE advance-minus-decline percentage (a 2 to 1 A/D ratio would be 66-33 = +33) reached a intraday high of +18, and finished at +4.
• The Nasdaq advance-minus-decline percentage only reached an intraday high of +7.5, and closed below -10.
• The hospitals mentioned yesterday here at BMB broke down further today.
• The semiconductors didn’t play at all today - they were lower - have flattened out and are in danger of rolling over (see Deron Wagner’s column today).
• Energy and commodity stocks are hitting or threatening new lows.

The big divergences in this market remain. The rally is concentrated in the biggest of big-caps, the Dow stocks. The rally doesn’t seem to be broadening out yet - as a matter of fact, it seems like it’s getting thinner by the day. Could things change? Certainly. But right now, this market is split, and you have to be very careful where you’re putting your money, if you choose to be in at all.

As CNBC hurts themselves getting all lathered up about the a new intra-day high on the Dow, I have but one question for you:

Does this feel anything at all like January of 2000 to you? Me neither.

Let’s get a little perspective on the new Dow high. Here’s Richard Russell, as quoted by Jeffrey Saut:

“In April 2002 – AIG, Pfizer (PFE) and Verizon (VZ) replaced AT&T (T), Kodak (EK) and International Paper (IP). But those have been the only changes. The amazing story is that 21 of the (30) Dow stocks (71%) are 20% off their all-time highs and 17 Dow stocks (57%) are at least 30% below their all-time highs.”

As BMB noted previously, only 10 of the 30 Dow stocks are higher than they were at the 2000 high. The value of the indexes don’t always accurately reflect what’s really going on inside that index, and most certainly not what’s happening in the rest of the market.

Does this mean that the rest of the stocks, and all the other indices, can’t catch up to the Dow and start sending the market to the moon? Of course not - anything can happen. But it’s important to keep things in perspective, and realize where all the pieces are, in relation to one another.

Just keep your eyes open and your feet on the ground, and don’t get too caught up in the headlines. Chasing headlines can get expensive.

Ok. Good. We finally got that new high on the Dow out of the way. Can CNBC be quiet now? I didn’t think so.

As we watch the Dow hitting new highs, we see that the S&P and the Nasdaq haven’t even cleared yesterday’s highs yet…

So the hurricane ‘experts’ are predicting just one more hurricane. They were pretty much completely wrong on this season’s forecast (trying to predict the weather can be that way) — so why should we believe them now? Ok, maybe the predictions get quite a bit easier now that ‘hurricane season’ is nearly over.

BMB can play that game. I predict that the Tennessee Titans will finish no better than 10-6 this year.

You know, if economic reports and government statistics can’t be reasonably accurate, why do they bother reporting them at all? And better yet, why does anyone pay any attention to them whatsoever? For as inaccurate as the numbers are, they make as well just make them up. Of course, maybe they do… Reminds me a lot of the news/media polls as election time draws near.

I suppose it’s that fact that they’re pretty much the only numbers we get. But that doesn’t make them useful. Today at The Big Picture, Barry takes a closer look at last week’s new home sales:

The reaction to last week’s New Home Sales — a surprising headline of a 4.1% rise in August — suggests to me that many people simply do not read beyond the headlines. That is a terrific way to insure you have an incorrect grasp of the data and details of any economic release.

This report was a perfect example: If you didn’t know 3 factoids about New Home Sales, you might be tempted to believe sales are stabilizing, and that the worst is over for housing. Here’s what you need to know anytime you see the New Home data:

• The data itself is reported not by a neutral observer, but by the Builders (an interested party) to the Commerce Department;
• The margin of error is typically greater than the reported number, rendering it statistically insignificant;
• Cancellations of New Home Sale contracts are omitted from both the inventory and sales data.

Let’s have a look at how strong the report was:

New Home Sales only appeared to rise due to a downward revision of sales in May, June and July. But for those downward revisions, the overall trend of slowing sales has been continuing. And, once the August data is revised, it will likely show further deterioration in sales.

Why the revisions? One reason may be cancellations. As Bloomberg’s Caroline Baum noted, “rising cancellations aren’t being captured in the aggregate statistics because of the way the survey is designed. Hence, sales are being overstated and inventories understated.”

Examples:

• Lennar said its cancellation rate was running at more than 30 percent. That means about 1 in 3 i of Lennar’s reported new home sales not only didn’t sell, but are back in the already bloated inventory stockpile. That’s on top of the 5 percent decrease in new slaes Lennar had in their quarter ending August 31.
• At D.R. Horton (the 2nd largest homebuilder in the US) “cancellation rates rose to 29 percent in the April-June quarter.” They deteriorated further in July. That’s about double their historic average;
• KB Home said net orders plummeted 43 percent in the three months ended August 31. That rate is inclusive of cancellations.

As you can see from 3 of the largest US homebuilders, actual new home sales — as opposed to reported ones — did not increase over 4%. Including cancellations, I would guess that new home sales actually dropped somewhere between 5-15%.

More weakness out of the gate today. Oh sure, the Dow is in the green, but remember - it’s just the Dow. The Nasdaq and S&P are flat or slightly red, and A/D lines are red as well. The only group making any headway is the airlines, getting another jolt from a move in oil prices below $60. And that oil move has the energy and commodity stocks reeling for another day.

Bonds are just slightly higher, yields down a bit. As we mentioned, oil is trading below $60/barrel, gasoline and natural gas are lower as well. Gold and silver are also taking it on the chin today. It’s another hate-the-commodities day, but the rest of the market doesn’t seem to be getting a lot of help from that attitude.

Deron Wagner is watching the semiconductors, which have flattened out and look to be rolling over:

The Semiconductor Index (SOX), a heavily weighted component of the Nasdaq, appears to be in the process of rolling over. On September 22, the index closed below support of its two-month uptrend line, but snapped back above it the following day. On September 27, it attempted to test its prior highs from the middle of September, but looming overhead resistance of the 200-day MA caused a bit of trepidation on the part of buyers. As such, the $SOX appears to have set a “lower high” over the past few days and has been showing relative weakness to the broad market. The Semiconductor HOLDR (SMH), which is poised to fall below its 20-day MA, has a very similar chart pattern.

Because we remain short the Semiconductor HOLDR (SMH), we continue to believe the $SOX will break back down below its primary uptrend line and at least test support of its 50-day moving average. If it does, this is a major negative for the broad market because the $SOX typically leads the Nasdaq, which often leads the S&P and Dow. Negative earnings guidance from Semiconductor stock Marvell Technology after yesterday’s close will likely weigh on the $SOX index today as well.

Keep an eye on those semis. Weak semis would not be good news for the market as a whole.