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.

Last Friday we said: “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.” Here’s how those same indices look after this week’s action.

Obviously, the Dow and S&P have broken out, and software, transportation and the brokers appear to have made their way out of those ranges as well. Semis had a nice run. Retail kinda snuck out, but not very convincingly, and the big banks are still stuck - although the regional banks had a great week (see $KRX chart).

Charts courtesy of StockCharts.com

Not a great day for stocks - but that didn’t stop the Dow and S&P from making new highs. I’m not sure anything can stop them anymore. The major indices finished mixed:

Bonds recovered from a couple of days of losses, and yields moved down:
6-month: 5.13%   2-yr: 4.76%   5-yr: 4.60%    10-yr: 4.60%    30-yr: 4.69%.

Market internals were negative for the day in a while. Volume was about the same as it has been most of the week on the NYSE, but dropped off on the Nasdaq. Advances/declines were 5 to 6 on the NYSE and 8 to 11 on the Nasdaq, with up/down volume 9 to 10 on the NYSE and 2 to 3 on the Nasdaq. New highs/lows were 162/17 on the NYSE and 145/42 on the Nasdaq.

Outside of the steel stocks (+4.1%), there weren’t many big movers to the upside - natural gas stocks were higher by 1.2%. On the down side, airlines (-1.6%) and transportation stocks (-1.0%) led the way.

Energy prices were mixed - sort of. Gasoline was higher by a couple of cents to $1.55/gallon and natural gas bounced back with a 42 cent gain to $8.18/mmBTU. Crude oil appeared to be lower by 40-some cents to $55.81/barrel. But before you get too excited about oil below $56/barrel, note that with today’s expiration of the December contract, the January ‘07 contract becomes the new ‘front month’ come Monday - and it is trading more than three dollars higher than the December contract, at around $58.85/barrel. Funny stuff can happen as these contracts expire. The dollar index slipped back to 85.33. Gold gained a few bucks to $622/ounce while silver dropped a couple of pennies to $12.73/ounce.

BMB Note: Well, today’s action didn’t change a heck of a lot, and we’re headed into a shortened holiday week, where light volume is the order of the day. That sometimes brings about some wild price swings, and sometimes can be incredibly boring. Maybe we’ll get some of each.

Some bizarro stuff going on the oil markets the last two days. I wonder how long this weird behavior around contract expiration will go on.

As usual, we’ll look at the sectors and groups over the weekend.

Steel stocks are on the move today. Here’s why - various buyout scenarios are being tossed around.

Remember that CERA report that came out the other day? The one that proclaimed that the world’s oil reserves were actually triple what was believed by the peak oil theorists?

Now it’s time to let the peak oil theorists have their say. David Shvartsman of Finance Trends Matter graciously informs us that the folks at The Oil Drum have prepared their response to the CERA report, and it doesn’t sound like they’re ready to throw in the towel on the idea that peak oil production is right around the corner:

We are concerned that CERA has “maintained a consistent contrary view” and not taken the peak oil hypothesis seriously until now. We can only agree that “this debate reflects one of the most important issues facing not only the energy industry, but the world at large.” We hope our response demonstrates that the peak oil hypothesis is anything but simplistic. Furthermore, no one here or elsewhere is claiming that conventional oil will “run out” anytime soon. Rather, the peak oil view is an evolving, sophisticated take on conventional oil production and the viability of substitutes to replace continuing demand for this paramount fossil fuel in the face of inevitable declines in available supply. Only the timing of such declines is at issue here. We can also only add that denial in the face of potentially very threatening events is a powerful force in the human psyche.

In conclusion, the peak oil debate is still alive and well, not moribund, as CERA and some mainstream media accounts would have you believe. We at The Oil Drum are not persuaded in the least by CERA’s often —and disappointingly— weak arguments which, ultimately, depend on many assumptions we consider unrealistic.

BMB isn’t trying to change any minds here. It’s up to you to decide who to believe. But it only stands to reason that ‘peak oil’ will occur sometime - any natural resource will become scarce over time when it consumed without replenishment. The argument is when the peak in world oil production will be reached. In my mind, it doesn’t really matter when it is - IF you’re ready for it when it gets here.

But in the case of oil, as a country and as a globe, we are certainly not yet prepared for that time.

Update: The article linked to in the Oil Drum summary paragraph is quite interesting as well. It’s entitled: “Peddling PetroProzac: CERA ignores 10 warning signposts of peak oil”. This fact caught my attention:

Half the oil ever produced has been consumed since 1983.

The major indices dipped early, but are now working their way back up toward the flat line, but advance/decline lines remain pretty well in the red. Some of the commodity areas are rebounding, with steels and metals leading the winners in the group list. Energy stocks seem to be reversing pretty well off their early lows - just an example of how NOT selling into a weak open might save you some money now and then. Homebuilders, paper stocks and airlines lead the losing groups.

Bonds are higher, pushing yields lower. Energy prices are mixed around the UNCH mark. The dollar is lower, gold and silver just slightly higher.

After yesterday’s nasty drop in the energy markets, we just have to check in with Phil Flynn’s Energy Report and get his take on the action:

Expiration ugly! Oil prices plummeted on futures expiration madness! December oil futures went off the board and made the eve of expiration look like the eve of destruction!

The sell-off started innocently enough when the complex got selling inspiration from the Department of Energy’s natural gas supply report. The EIA reported a larger than expected injection of 5 billion cubic feet of natural gas and that, along with reports of modest temperatures, started the selling in the complex. But then once the selling took hold it could not seem to stop and a modest break turned into a rout. Once again the expiration for crude futures turned into an ugly selling affair.

What is it about the expiration of the crude futures contract that turns traders into rabid sellers? It’s getting to be kind of like when a werewolf sees a full moon. Oil is in contango and it seems that in the kind of contango world in which we live, you just sell. It seems that the market is still carrying a large risk premium for terror that needs to get squeezed out at expiration and even though we don’t talk about it, it’s obviously there.

Yet it could be more than that. The sell-off knocked out some key technical support that is signaling that this market better bounce and bounce quick or it could go substantially lower.

Now some tried to say that the selling had a lot to do with doubts about OPEC following through with production cuts but if you believe a report from PetroLogistics, there should not be any doubt about it whatsoever. According to the OPEC production tracking firm OPEC’s November production will fall by 1.1 million barrels, just 100,000 barrels shy of what they promised. That news should have been more than enough to lift the cloud of doubt on the word of the OPEC cartel. But a conflicting report stated that OPEC’s exports are expected to increase in the next four weeks. Who do you believe! Well I guess if you use yesterday’s market action as a guide you believe the report that calls OPEC a liar.

And where are the commodities funds? Have they abandoned oil? Is money flowing away from commodities and back into stocks? What the heck is going on around here? Stocks are fun but oil is more fun!

And so it goes. Rarely a dull moment in the markets. I’d say ‘never’, but holiday weeks like next week can be pretty boring…

Deron Wagner on yesterday’s weakness in the commodities:

Minor price retracements within the context of an uptrend are normal, but yesterday’s weakness in the commodities, especially oil, was clearly the result of institutional distribution. Ironically, the heavy selling hit the commodities just as we started to become pretty bullish on the sector. As you might have guessed, the bearish commodities action made for a challenging day. Three of our five open positions stopped out within several hours of one another…

If you’re new to our daily commentary, this is where you may be expecting me to shed light on the situation by defending our positions and explaining on a technical level exactly why we had such a tough day yesterday. But long-time readers know that we always report the facts rather than spinning a bunch of fluff or hype. The basic fact is that we were just plain wrong! As always, we obviously had valid technical reasons for entering each of our ETF trades, but they simply didn’t work out. Learning to take full responsibility for both your winning and losing trades, rather than blaming external influences, is a critical element of becoming a consistently profitable professional trader.

Looking forward, he’s decided that it’s time to be cautious:

we must confess that the market has begun fooling us over the past several days. Numerous sectors we expected to show strength have suddenly started to exhibit relative weakness, and vice versa. A good example is how the strength in the commodities completely disappeared, while the Real Estate Index ($DJR) has retraced 75% of its loss from last week’s breakdown below its uptrend line. There are other instances as well. For that reason, we have shifted into SOH (”sitting on hands”) mode, a conservative overall trading approach reserved for situations like this that occur several times per year. For the time being, we are totally content with merely managing our remaining positions, but sitting on the sidelines with regard to new trade entries. When most of the industry sectors stare following through again, we will be ready to attack, but cash is king until the waters look safer.

Can’t blame him. The weakness in the commodities took BMB by surprise too, and will likely lead to some lightening up on positions here as well.

Hmm. Those calling the bottom in the housing market are going to have a tough time spinning this one:

Home builders retreated on a massive scale in October, dashing hopes for a quick turnaround in the nation’s housing market.

Starts of new homes plunged 14.6% last month to a seasonally adjusted annual rate of 1.486 million, the lowest level since July 2000, the Commerce Department estimated Friday.

Building permits fell as well, down 6.3% to a seasonally adjusted annual rate of 1.535 million, the lowest in nine years. It was the largest percentage decline in permits in seven years.

I’ve got it. Now’s the time for them to point to the huge margin of error in these numbers! Oops, this time, the numbers are supposedly outside that margin. From the government report:

Privately-owned housing starts in October were at a seasonally adjusted annual rate of 1,486,000. This is 14.6 percent (±7.6%) below the revised September estimate of 1,740,000 and is 27.4 percent (±5.3%) below the October 2005 rate of 2,046,000.

Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 1,535,000. This is 6.3 percent (±1.2%) below the revised September rate of 1,638,000 and is 28.0 percent (±1.2%) below the October 2005 estimate of 2,131,000.

I don’t think I’m going to be able to help them much on this one…

Update: Check out the charts of starts and permits that Barry has up at The Big Picture. I think the uptrend off the lows in the early 90’s has been broken. And while you’re over there, look at the chart of home sales and inventories in Palm Beach County from Doug Kass too.