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.

Gary Kaltbaum sees tops in some brokers and retail, struggling homebuilders and a rebound in commodities helped by a weak dollar:

Very simply, we think the themes are starting to change here. Whether or not these themes affect the major indices is another story…but we will be watching. We did get another decent distribution day on Thursday and I am seeing a decent amount of breakdowns…but not enough to affect the major indices so far.

To get a better idea of where the market is headed, watch for some of these trading ranges to be resolved, in one direction or the other:

Charts courtesy of StockCharts.com

Another pretty ‘blah’ day for stocks overall, with the movers coming in only a few groups, due to a drop in oil prices and a drop in interest rates. Amongst the major, the Transports got the benefit of the oil price drop:

Bonds were higher, and are now pushing yields back down to test their recent lows once again:
6-month: 5.14%   2-yr: 4.74%   5-yr: 4.57%    10-yr: 4.59%    30-yr: 4.69%.

Market internals were positive, but volume was quite light, possibly a Veteran’s Day holiday effect. Advances/declines were 21 to 11 on the NYSE and 3 to 2 on the Nasdaq, with up/down volume 5 to 4 on both exchanges. New highs/lows were 205/19 on the NYSE and 107/50 on the Nasdaq.

Groups moving higher were the airlines (+2.7%), housing stocks (+2.1%), transportation (+1.7%), brokers (+1.4%), semiconductors (+1.0%) and retailers (+1.0%). Giving up ground were the gold and silver stocks (-2.4%), steel stocks (-1.9%), commodity stocks (-1.8%), oil services (-1.8%) and natural resources (-1.2%).

Energy prices were lower across the board, with crude oil giving back all of yesterday’s gains on the IEA’s lowered demand forecast. Crude dropped to $59.66/barrel, gasoline fell to $1.56/gallon and natural gas slipped to $7.76/mmBTU. After a morning drop below 85, the dollar index stemmed its losses and finished at 85.05. Gold gave back a few bucks to $629/ounce, but silver added a penny to $13.01/ounce.

BMB Note: A pretty unspectacular day, with most of the movement being triggered by oil and interest rates news. It doesn’t change the technical picture much at all, especially given the low volume turnaround today.

Stick close to the energy and commodity areas until the rest of the market decides whether it’s going higher or lower. That’s still up in the air.

I saw NYSE stock, symbol NYX crossing my list of new highs today. Checking the chart, I see it’s up about 33% (from 72 to 96) in the last six or seven days, with 16 of those 24 points in the past two days.

I’m not sure what got it started, but here’s where those last 16 points came from. I guess people are still listening to him, for whatever reason.

I wish he’d go away. I’m afraid we’re going to need one heckuva bear market before people finally give up on him though.

The silliness of the government numbers just gets worse and worse. We’ve talked before about the housing starts numbers, and how the margin of error usually includes zero - meaning that when we’re told that housing starts increased, there is very often a chance that may not be true at all: the number could have indeed decreased instead.

Turns out, as Barry discusses at The Big Picture today, the same is true for the big monthly jobs number - the Non-Farm Payrolls:

Sy Harding, author of Riding the Bear, writes: “In the fine print of the employment report each month, under a section titled ‘Reliability of the Estimates’, is this statement: ‘The confidence level for the monthly change in total employment is on the order of plus or minus 430,000 jobs.’

To quote from the BLS release (emphasis mine):

“For example, the confidence interval for the monthly change in total employment from the household survey is on the order of plus or minus 430,000. Suppose the estimate of total employment increases by 100,000 from one month to the next. The 90-percent confidence interval on the monthly change would range from -330,000 to 530,000 (100,000 +/- 430,000).”

“These figures do not mean that the sample results are off by these magnitudes, but rather that there is about a 90-percent chance that the “true” over-the-month change lies within this interval. Since this range includes values of less than zero, we could not say with confidence that employment had, in fact, increased.”

This is the same type of language we get in the housing numbers. It may as well be, “To be perfectly honest, since the range includes zero, we’re really not quite sure if we’re coming or going. We’re taking a stab at it, but if truth be told, we haven’t got a clue.”

Considering we’ve seen jobs numbers on the order of +100,000 - +200,000 for quite a while now, Barry says:

Yes, its true: Zero was within the 90% confidence interval for the monthly change for nearly every month for the past 2 years!

Harding states this is nearly double the prior fudge factor.

This is an absolute joke. So, if we hear housing starts are up, they could actually be down. If we hear jobs increased by 130,000, they could actually have decreased by 300,000. And this doesn’t even take into account that a large percentage of those so-called ‘jobs’ are created and destroyed by a purely theoretical ‘birth/death’ model.

These government statistics are a total embarassment, an absolute joke - and the market still listens to them and trades off them. It’s rather sick.

…and it’s impact on commodity prices.

First, some skepticism (after yesterday’s announcement by the Chinese on diversification of their reserves) that the Chinese would be in buying large quantities of gold.

Second, large Chinese inventories are putting a damper on copper prices, in addition to the weakness in the US housing market:

Total inventory of copper at warehouses monitored by exchanges in London, New York and Shanghai jumped to 210,541 tons as of today, the highest since March 13.

A slowing U.S. housing market also will dampen copper prices in the next year, Merrill said. Home construction fell last quarter at the fastest rate since 1991. Builders are the biggest buyers of copper, which is used in wire and pipe.

“We do not believe the worst of the U.S. housing cycle is behind us and the full impact of reduced demand for copper may not be felt until early-mid 2007,” Merrill said in the report.

Not a lot of earth-shaking moves going on today. The majors are hanging right around the flat line, but the Trannies are up a percent. A/D lines are in the green.

The groups are split again, with the energies / commodities doing some pulling back. The homebuilders are getting a big bounce (setting up short candidates?), along with the airlines and transportation stocks as they get a bit of a break in oil prices.

Bonds are higher, pushing yields down - maybe that’s the fuel for the rally in the homebuilding stocks. I can’t see any other reason at the moment. Energy prices are lower, helped down by a cut in the IEA’s demand forecast (as if they have a clue). The dollar index has fallen below 85, but gold and silver are both pulling back anyway. Not that surprising after yesterday’s big move up.

Deron Wagner has the answer for you:

Although stocks rose in higher volume in each of the two preceding sessions, significantly more shares traded hands yesterday than in either of the “accumulation days.” The 2.45 billion shares traded in the Nasdaq was the highest since September 15. Obviously, it was negative that such a spike in volume occurred on a down day. Yesterday was the fourth “distribution day” in the Nasdaq within the past month, while it was the third such day of institutional selling in the NYSE. Healthy markets can typically digest two to three days of higher volume selling within such a period, but it is definitely a warning sign to the bulls when the rolling count of “distribution days” exceeds four days within a four week period. Remember that volume is always the footprint of institutional activity that shows what is really happening “under the hood” of the market. Since institutional trading activity accounts for more than half of the market’s turnover on any given day, the stock market always follows the lead of mutual funds, hedge funds, pension funds, and other institutions. That’s why we pay so much attention to the daily relationship between the market’s price and volume.

So where does the market go from here? Good question. So sometimes, during times like this, you look to areas that can trade somewhat independently of the rest of the market, like the commodities:

The market has been giving a lot of mixed signals that make it difficult to predict whether the S&P and Nasdaq break out to new highs or move down to their prior lows. Many sectors and leading stocks have had both false breakouts and breakdowns, and the market has been showing a mix of accumulation and distribution as well. The outcome, however, doesn’t matter to us either way because our goal is not to predict which way the market will go. Rather, our job is to be thoroughly prepared to react and profit from moves in either direction. We’re satisfied with our current mix of open ETF positions, as oil, and especially gold, both trade largely independently of the stock market.