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.

From ETF Trends, the addition of eight new fixed income ETFs from Barclays:

• iShares Lehman Short Treasury Bond Fund (SHV)
• iShares Lehman 3-7 Year Treasury Bond Fund (IEI)
• iShares Lehman 10-20 Year Treasury Bond Fund (TLH)
• iShares Lehman 1-3 Year Credit Bond Fund (CSJ)
• iShares Lehman Intermediate Credit Bond Fund (CIU)
• iShares Lehman Credit Bond Fund (CFT)
• iShares Lehman Intermediate Government/Credit Bond Fund (GVI)
• iShares Lehman Lehman Government/Credit Bond Fund (GBF)

I don’t know - with bonds in the tank lately, I’m not sure any bond ETFs are all that attractive right now. And do we really need more bond ETFs? What’s wrong with the ones we’ve got - like IEF, TLT and the gang? Those are iShares offerings too, aren’t they?

At The Big Picture today, Barry takes a look at the two sides of the “housing bottom debate”. The National Association of Realtors has pretty much declared that the bottom is in and behind us, and that housing prices are on their way back up. Barry doesn’t seem to be buying the NAR’s rosy forecast:

That’s the drug-addled ravings most recently unveiled by the tripheads at the National Association of Realtors. At a recent Rave, David Lereah was heard to say: “Dude, look at the trails — and the colors! Awesome!” He then giggled and wandered off, muttering to himself about New Home cancellation rates.

The rest of the NAR release amounted to a thinly veiled cry for help, revealing deep problems with either alcohol abuse or dementia. In a related development, several NAR economists were treated for blunt head trauma, a medical condition which helps explain the rest of their recent public statements.

As for some hard evidence of what’s really going on, Barry turns to a few statements from the homebuilders themselves. Kinda like this one:

Meritage Homes Corp. (MTH) said net orders fell 42%, cancellations hit a record high, and the company will take land-related writedowns in the fourth quarter as Meritage, like others in the sector, struggles with a crumbling housing market. The Scottsdale, Ariz., home builder reported net sales of 1,201 homes valued at $356 million, down from 2,072 orders valued at $723 million a year earlier. The weak sales were largely attributed to a surge in cancellations by jittery homebuyers worried about the volatile housing market. The company’s cancellation rate soared to an all-time high of 48% of the company’s gross orders in the quarter, up from 32% a year earlier.

From the looks of things in the stock market at the moment, the opinion is either that the NAR is right, and the bottom is in, or that it doesn’t matter. Sure, housing might have itself a problem, but it doesn’t matter a hill of beans to the rest of the economy or stocks. After all, hey, Apple’s got a phone!!!

We shall see…

	The Nasdaq 100 has gone from falling out of bed to setting new highs in about 10 trading days.
	The airlines have been “flying high”, taking advantage of plunging oil prices and some merger/buyout talk. AMR, CAL, JBLU and UAUA all set new highs today.
	Bond prices have been falling, and interest rates have risen to new multi-month highs. That’s probably not great news for all those folks that are looking to refinance those ARMs.

Charts courtesy of StockCharts.com

Another pretty good day for most stocks, as we got some follow through from yesterday’s positive reversal, and got better participation from a larger percentage of stocks as even the small-caps joined in the little party. Most of the gains came early, and the markets traded pretty much sideways after the first hour or two:

Treasuries had another rough day, as prices went down and yields went up:
6-month: 5.14%   2-yr: 4.86%   5-yr: 4.73%    10-yr: 4.73%    30-yr: 4.82%.

Market internals were positive. Volume hasn’t been spectacular during these last couple of positive days, but has been right around average for the year thus far. Advances/declines were 7 to 3 on the NYSE and 2 to 1 on the Nasdaq, with up/down volume 7 to 3 on NYSE and just below 7 to 3 on the Nasdaq. Most of the new highs came in the morning - new highs/lows were 263/25 on the NYSE and 150/42 on the Nasdaq.

Most of the groups glowed green. The winners were led by the airlines (+3.1%), HMOs (+2.1%), brokers (+1.7%), homebuilders (+1.6%), retail (+1.5%), transportation (+1.5%), chemicals (+1.4%), biotechs (+1.3%) and health care products (+1.3%). The only group to show a sizeable loss was the oil services, falling 1.3% as oil prices continue to plummet.

Energy prices continue to amaze all with their newfound weakness. Crude oil dropped another couple of bucks to $51.88/barrel. Gasoline fell 3 cents to $1.40/gallon, and natural gas got hit hard, dropping to $6.29/mmBTU. The dollar index moved up to 85.28 as interest rates help prop up the dollar. Gold and silver were near unchanged at $612/ounce and $12.30/ounce.

BMB Note: Some healthy follow-through to yesterday’s big tech bounce. Breakouts starting to show up in the charts of the airlines, the brokers, internets, etc. The start of another bull move? Or just the “Weird Wally Wednesday” phenomenon? Who knows? But if the good action continues, we should start to see some nice long setups on pullbacks.

The trouble in the energy patch just seems to know no end. I’m sure an end will come sooner or later, but for now, it’s just a disaster. BMB took a little profit on his energy shorts, and we’ll let the rest ride to see how far down they want to go.

On the news front, we get import/export prices tomorrow along with retail sales. Probably a little more to look for in the news next week, when we’ll see stuff like CPI, PPI, housing starts and the Philly Fed. And of course, earnings reports will start coming in droves pretty soon. Fun, fun, fun.

Remember that ‘island reversal’ we looked at in the FXI the other day - the iShares FTSE/Xinhua China 25 Index Fund? The chart was starting to look a little spooky at that point. Well, since that top of 118.04 on Jan. 3, the FXI has fallen to a recent low yesterday of 98.20, before bouncing back up to its current price of 104.15.

BMB wasn’t the only one who thought that chart might be headed for a little trouble. Mark Abeter of S&P Equity Research has a little discussion of FXI at BusinessWeek.com:

We have two major concerns about the FXI, and similar overseas investments. Number one, the chart has gone asymptotic and trading volume has exploded. The second is less scientific and more of an educated guess. And that is, we doubt investors really know anything about the companies in the fund, other than that they are based in China. The saving grace may be that these are large companies with a track record and not a ’90’s Internet company with zero revenues and no track record.

The chart of the FXI is downright scary, in our view, and due for a major correction. The ETF bottomed out at 66 on June 13, 2006, and as of the close on January 3, 2007, has soared a remarkable 76% in less than 7 months. More incredibly, the FXI has spiked over 26% since November 28, and 13.5% since December 21. Can you say “mass speculation”?

Since the last major low in June, 2006, the slope of the advance has changed four different times, getting steeper every time. Trading volume has exploded in the first trading days of 2007, running almost three times that of average daily volume. This is very typical of a speculative blowoff, and many times, they end badly. Daily momentum is extremely overbought, and has traced out negative divergences. As of January 3, the ETF was an incredible 39% above its 200-day exponential moving average.

The cycle of market emotions has gone from optimism to euphoria very quickly. Unfortunately, it is likely to reverse to fear then panic, in our opinion. How this all plays out for the U.S. market is difficult to say, but it is not healthy and screams of an intermediate-term top, in our view.

Hat tip to Tom Lydon at ETFTrends.com.

These days, when were talking about 4GB and 8GB MP3 players and telephones with hard disk drives the size of your thumb, it might be interesting to look back at the technology and see how far we’ve traveled over the years.

A former co-worker sent this email to me the other day:

An early surge upward has relaxed a bit, but things remain pretty green after the first hour of trading. At this point, it’s the small caps/Russell leading the indices, and the REITs, metals and oil services leading the groups higher.

Bonds are slightly lower again, yields up. Energy prices are fairly flat, with crude recovering from losses overnight. The dollar index is a little higher, gold and silver also up.

Deron Wagner has his eyes on some of the tech groups, and yesterday’s action was pretty encouraging:

Prior to yesterday, we had been advocating general avoidance of new positions on both sides of the market. However, with such positive money flow into the tech stocks making itself known, purchases in the Semiconductor, Software, Hardware, or Internet sectors are relatively low risk. We especially like the idea of buying SMH for an intermediate-term trade on a breakout above its weekly downtrend line. Nevertheless, most of the “old economy” sectors that comprise the S&P and Dow have not yet set up for long entry points. The exception is the Securities Broker-Dealer Index ($XBD), which closed at a fresh record high yesterday.

Every now and then, I recall when Mark Leibovit of VRTrader.com was a regular guest on Gary Kaltbaum’s radio show, and he would talk about “Weird Wally Wednesday”, the term he used to refer to the Wednesday (basically Tuesday - Thursday) of the week before options expiration. He said that often times the market would make moves in the middle of the week before options expiration, rather than during the week of expiration itself. So when things get stirred up a little the week before expiration, I always remember Mark talking about that.