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, from earlier today, on yesterday’s wild action:

I dont know how to describe Wednesday’s action but I will say that if the market did not rally back, it would have been one of the most ominous negative reversals we would have seen in a long time…but the market did rally back…so let’s just say, the fight is on between buyers and sellers. Normally, after a move up, when we start to see this type of action, it is a sign of a pending change in the market’s direction. As of this second, I believe you have to start thinking more defensively as the market has not had a meaningful correction in quite a while. But I have more important things about a few sectors.

I believe the HOMEBUILDING move off the recent lows is probably over. Technically, the series of higher lows has been aborted and believe we will see downside testing. You know how I feel about the overall homebuilding business. You cannot spin what we are seeing in lower prices, massive inventory as well as cancellations.

Say good-bye to most COMMODITY areas. OILS, GOLD, SILVER, COPPER, STEEL, ALUMINUM and the like have rolled over not only as COMMODITIES but the underlying stocks. Any bounces are sellable as support levels have been broken badly. OIL prices have broke recent lows. COPPER prices have broke recent lows. GOLD and SILVER prices have traced out ominous tops.

All this and we are just in the second day of the year. I will be watching support levels and moving averages very closely on the major indices at this time. Frankly, I am one that would love to see a correction. I believe in order for markets to ultimately go higher, markets have to wipe the smiles off the bulls faces and throw some bones to the bears. Too much bullishness and too much complacency is not a good thing.

Even with today’s big move up in tech stocks, only the networking group has managed to move to new highs. I’d like to see some of these groups - and a few of the major indices - move to new highs and hold them before getting too interested. Even then, I’m not sure they can be trusted…but I’d have to give them the benefit of the doubt.

The big run in the Chinese stocks may have topped out yesterday with the ‘island reversal’, created on the gap up yesterday and the gap down today.

Charts courtesy of StockCharts.com

Another pretty bizarro day for stocks. Things started rather poorly, but gradually improved as the day wore on. We still ended up with a pretty split tape, however, as the meltdown continued in the energy and commodity areas but, for whatever reason, the tech-heads were buying like crazy. That created a rather wide divergence between the Nasdaq indices and the rest of the majors:

Bonds were a little tamer, rallying early, then holding their gains, sending yields lower again:
6-month: 5.06%   2-yr: 4.70%   5-yr: 4.59%    10-yr: 4.61%    30-yr: 4.71%.

Market internals started poorly, but improved as the day wore on, though even with the Nasdaq gains, the Nasdaq A/D line didn’t cross above zero until late in the day - though the up/down volume was decidedly positive (Is everybody chasing the same stocks?). Volume fell back from yesterday’s high levels, but was still better than we were seeing during the holiday period. Advances/declines were just below flat on the NYSE, but a positive 11 to 8 on the Nasdaq. Up/down volume was in the red by 5 to 6 on the NYSE but a positive 3 to 1 on the Nasdaq. New highs/lows were 146/31 on the NYSE and 104/44 on the Nasdaq.

The group picture was pretty evenly split between winners and losers. On the green side were internets (+2.4%), semiconductors (+2.0%), software (+1.7%), networkers (+1.7%), computer tech (+1.6%), airlines (+1.5%), computer hardward (+1.4%), biotechs (+1.4%), transportation (+1.4%), drug stocks (+1.3%) and health care products (+1.3%). Leading the losers were oil services (-2.9%), natural resources (-2.0%), oil stocks (-1.9%), gold and silver stocks (-1.9%), commodities (-1.4%) and paper stocks (-1.3%).

Crude oil prices took another belly flop, dropping nearly 3 bucks to $55.59 - that’s a drop of $5.46 in just two trading sessions. Gasoline fell another 6 cents to $1.49/gallon (go get the Hummer and fill ‘er up!), but natural gas prices held steady at $6.16mmBTU. The dollar index moved higher again, to 84.33. Gold fell to $622/ounce while silver gained a few cents to $12.57/ounce.

BMB Note: This market just gets more frustrating by the day, at least for a trend follower. Sector rotation seems to last only days, if not hours sometimes. So, what got the techies going today? I mean, what would make Intel jump 4%, or Dell 3%? I have no idea. But the big move in the Nasdaq sent my short position packing.

A nice move in tech, but not much elsewhere. Sure, the Transports have done well over the past couple of days on the move down in oil, but that doesn’t put the chart in much better shape.

I look at the charts of the major indices - a lot of sideways going on. I look at the various sector charts, and there’s a lot of sideways going on there too. That doesn’t make for a very good trading environment. I don’t see any compelling areas to be long, and shorts aren’t working - unless you happened to sell energy/commodity stocks before the New Year.

I guess I’ll just take up knitting.

The weekly oil inventory data shows a slight drawdown in crude oil, but builds in gasoline and distillates:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) declined by 1.3 million barrels compared to the previous week. However, at 319.7 million barrels, U.S. crude oil inventories remain above the upper end of the average range for this time of year. Total motor gasoline inventories rose by 5.6 million barrels last week, and are in the middle of the average range. Distillate fuel inventories increased by 2.0 million barrels, and are in the upper half of the average range for this time of year.

Refineries are cranking away, operating at 91.0% of their capacity. On the demand side of things:

Total products supplied over the last four-week period has averaged nearly 20.9 million barrels per day, or 3.0 percent less than averaged over the same period last year. Over the last four weeks, motor gasoline demand has averaged over 9.3 million barrels per day, or 0.5 percent above the same period last year. Distillate fuel demand has averaged nearly 4.3 million barrels per day over the last four weeks, or 1.3 percent below the same period last year. Jet fuel demand is down 8.1 percent over the last four weeks compared to the same four-week period last year.

Hard to get a good handle on things so far, with the indices starting lower, now moving back toward the zero line, with Nasdaq/Techland doing a little better. A/D lines remain in the red, though have shown improvement. Leading the winners thus far are biotech, drugs, internet, semiconductors and health care products. On the down side we find disk drives, paper and chemicals. The energy complex started lower again today, but has recovered some of those early losses.

Bonds are higher, yields lower. Energy prices are mixed, with crude and gasoline lower, but natural gas a little higher. The dollar is fairly flat, gold is flat, and silver up slightly.

Some interesting moves took place in the energy arena yesterday. Here’s Phil Flynn with today’s Energy Report to try and sort it all out:

The sun was hot that day and caused a major commodity melt down and that’s the way the commodity crumbles. The crude oil got crushed and was led into the abyss by the heating oil market. As Tom Hudson of First Business TV said warm weather is an incontinent truth for the energy bulls.

Traders are back from the holiday and found little reason to buy as they were more than likely still tallying their golf scores in an unlikely January round from the day before. A balmy Northeast and the lack of heating oil demand bombed the energy complex. Why buy oil when the weather is extremely warm? Not to mention that the supply of crude oil should rebound sharply in today’s supply report and the dollar has had a big time rebound?

On the economic front,a number that really is longer term bullish for oil, was short term bearish as the rebound in manufacturing on the ISM helped support the dollar. Now despite the fact that the ISM is a good forward indicator of over all energy demand, the warm weather had traders focus more on the more short term intermediate impact of the strong dollar. A stronger dollar means OPEC will need fewer dollars for that barrel of oil. That of course is assuming they want dollars at all because the weakness in the dollar has been accelerated by the fact that there is a perception that those who hold those precious petro dollars want to exchange them for other things like gold and other currency. Of course as long as crude oil is still quoted in dollars the dollar will still impact barrel prices.

That dollar rally hurt other commodities as well. Copper continued to get crushed as rising inventories seemed to suggest slack demand. The big commodity reversal hit silver and gold as well which were higher but later reversed. The ISM did to commodities what the Fed minutes did to the stock market.

And now that the market has caught up with the warm weather they will now come to grips with what is going on the inventory side of the equation.

Some comments from Deron Wagner on yesterday’s wild action:

Yesterday was a wild session filled with volatile, whipsaw moves in both directions that left the major indices with mixed results. The Nasdaq Composite, with a maximum intraday gain of 1.7% and loss of 0.9%, closed 0.3% higher. Both the S&P 500 and Dow Jones Industrial Average were equally as indecisive, but closed with a loss of 0.1% and a gain of 0.1% respectively. The small-cap Russell 2000 was unchanged, while the S&P Midcap 400 Index advanced 0.4%. If you missed the intraday trading action and only saw the final closing figures in the news, you might have assumed yesterday was a relatively uneventful day, but it certainly wasn’t! Instead, it was an erratic, high momentum tug-of-war between the bulls and bears. Since each of the major indices finished in the bottom half of their intraday ranges, the bears slightly had the upper hand in the end, but not overwhelmingly.

Yesterday’s candlestick patterns in both the S&P and Nasdaq consisted of a narrow body, but with long “wicks” or “tails” on both sides of the body. This type of pattern is known as a “long-legged doji” candlestick and it indicates the market was very indecisive. For this type of pattern to form, the stock or index must have traded well above and below the opening price level, but close the session near that opening price. Basically, the bulls and bears battled it out, but no clear winner emerged in the end.

Going into today, new support and resistance in the S&P and Nasdaq will simply be equal to yesterday’s lows and highs in both indices. Support for the S&P is at 1,407, while resistance of the high is at 1,429. For the Nasdaq Composite, those levels are 2,394 and 2,454. As long as both indices stay within those price ranges, be careful out there because it’s bound to be choppy!

Fortunately, the type of trading action we experienced yesterday is relatively uncommon, but the bad news is that such conditions can result in rapid losses to your trading account if you lack discipline. Obviously, nobody knows how long it will take for the market to resolve itself in one direction or the other, so it is imperative that you take steps to protect yourself from substantial losses in such a whippy environment. We suggest reducing your share size on all new positions and also using mechanical stop orders if you have trouble pulling the trigger and cutting your losses in volatile markets.