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.

School districts messing around in interest rate derivatives. And losing:

The third-poorest city in Pennsylvania is a lot poorer because of a 28-year bet on interest rates that already has gone awry.

The Reading, Pennsylvania, school district, which has 18,323 students, this week must pay $230,000 to Deutsche Bank AG, Germany’s largest bank, because it’s on the losing side of a wager that long-term interest rates will rise faster than short- term interest rates. In April, the board rushed approval of the so-called interest rate swap in eight days after its adviser said the transaction may earn the district $16 million by 2034.

Local governments from Augusta, Georgia, to Oakland, California, are being lured by similar opportunities to speculate with derivatives created by the world’s biggest banks. Most of the $400 billion of private agreements sold to municipalities escape taxpayers’ notice and are little understood by the public officials and administrators who approve them.

Yikes. I smell trouble brewing. Big trouble.

Hat tip to Mish’s Global Economic Trend Analysis.

	The semis continue to be a huge thorn in the market’s side.
	But the retailers are cruising - with JCP and TGT hitting new highs today - along with the drug stocks.
	If housing is in trouble, you wouldn’t know it by looking at some of the companies that supply building products, like American Standard and Vulcan Materials.

Charts courtesy of StockCharts.com

IBM, another leading stock, and a Dow stock, announced earnings after the bell tonight. Big Blue closed at 99.45, and is now trading just below 95. That’s not going to help matters tomorrow, you wouldn’t think.

Well, that was a pretty odd day. A near complete meltdown in tech stocks, yet the selling didn’t seem to work its way into other areas of the market enough to cause a great deal of trouble everywhere. Nonetheless, internals were pretty ugly, making the day somewhat worse than the Dow and S&P might indicate:

Bonds moved higher, bringing yields down from their recent lofty levels:
6-month: 5.15%   2-yr: 4.88%   5-yr: 4.75    10-yr: 4.75%    30-yr: 4.84%.

Market internals were pretty gross, especially on the Nasdaq side, and volume picked up on both exchanges, not a combination you really want to see. Advances/declines were 2 to 3 on the NYSE and 3 to 7 on the Nasdaq, with up/down volume was 2 to 3 on the NYSE and worse than 1 to 4 on Nasdaq. New highs/lows were 205/25 on the NYSE and 97/61 on the Nasdaq.

The group picture was mostly red, but there were a few green patches, led by retail (+1.3%) and drug stocks (+0.9%). On the losing side, the numbers got a little ugly: semiconductors (-3.9%), HMOs (-2.7%), disk drives (-2.6%), computer hardware (-2.6%), networking (-2.4%), internet (-2.0%), gold and silver stocks (-1.9%), software (-1.8%), metals and mining (-1.8%), computer tech (-1.7%) and steel stocks (-1.6%).

Energy prices were mixed for yet another day. Crude oil got smacked for more than a dollar-and-a-half, down to $50.48/barrel and gasoline slipped to $1.36/gallon, but natural gas gained a few cents to $6.32/mmBTU. The dollar index bounced around and ended near UNCH at 84.93. Gold slipped a few bucks to $628/ounce and silver dropped to $12.60/ounce.

BMB Note: So, what do ya make of that one? If the selling had been more widespread and panicky, I’d be saying we’re seeing signs of a top. But it’s hard to make that call, especially since we’ve seen stocks get smacked down and get right back up again quite a bit lately. And not all of the leaders are breaking down, although along with tech, we’re seeing a little pullback in the airlines and the brokers. But retail stocks hit new highs today, and I wouldn’t necessarily consider that a very defensive posture. But the health care stocks are also doing well, and they most certainly can be considered defensive.

Obviously, today’s move down in the Nasdaq / Nasdaq 100 can not be considered good news. Those indices have now given back last week’s breakouts, and not by just a bit either, but with conviction. That leaves them smack dab in the middle, once again, of a 2-month trading range.

Well, tomorrow is options expiration - a lot of times, prices get somewhat pinned in place for that event, so if we don’t see a lot of movement tomorrow, that could be a reason. But moving into next week, it will definitely pay to be pretty cautious, just in case this ‘tech disease’ starts to spread to other areas.

CNBC seems to be trying pretty hard to dance around the more than one percent drop in the Nasdaq today (and 1.6% drop in the Nasdaq 100), choosing instead to focus on near-$50 oil and the Dow’s ‘inability to find a direction’.

But if this action holds, it’ll be pretty hard to believe that the last three days of crumbling in the tech stocks isn’t important.

I’m sure all of this is quite difficult for CNBC, since much of the crumbling has been taking place in their #1 pet stock, that being Apple. And their #2 pet stock, GOOG, hasn’t fared a lot better.

Investor Jim Rogers, author of “Adventure Capitalist” and “Hot Commodities”, says we will see oil prices at or above $100 before the bull run is over:

“I’m just not smart enough to know how far down it will go and how long it will stay, but I do know that within the context of the bull market, oil will go over $100,” Rogers said in a Tokyo interview. “It will go over $150. Whether that is in 2009 or 2013, I don’t have a clue, but I know it’s going to happen.”

Crude oil in New York has fallen 34 percent to a 19-month low since it peaked at a record $78.40 a barrel in July. Rogers, author of “Hot Commodities,” has said oil will keep rising because there hasn’t been a major discovery for 30 years and economic growth in China and across Asia is driving up demand.

“When you have big bull markets, 50 percent corrections, or retractions, are normal,” he said in an interview yesterday. “It has often happened throughout history in a bull market.”

“Corrections go down long enough to scare everybody out and make sure they give up, and then they turn around,” he said. “We are in a secular bull market for commodities which has another decade or two to go.”

Hat tip to David at Finance Trends Matter.

Some pretty heavy selling in tech today, particularly in Apple and some of the semiconductors. AAPL, AMAT, BRCM, KLAC, MRVL and NVDA all down in the neighborhood of 4-5% today.

The weekly inventory data from the DOE shows builds across the board:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) jumped by 6.8 million barrels compared to the previous week. At 321.5 million barrels, U.S. crude oil inventories are above the upper end of the average range for this time of year. Total motor gasoline inventories rose by 3.5 million barrels last week, and are at the upper end of the average range. Distillate fuel inventories increased by 0.9 million barrels, and remain above the upper end of the average range for this time of year.

Refineries were operating at 87.9% of capacity, and YOY demand is up only for gasoline:

Total products supplied over the last four-week period has averaged over 20.2 million barrels per day, or 3.5 percent less than averaged over the same period last year. Over the last four weeks, motor gasoline demand has averaged nearly 9.2 million barrels per day, or 1.2 percent above the same period last year. Distillate fuel demand has averaged over 4.1 million barrels per day over the last four weeks, or 3.6 percent below the same period last year. Jet fuel demand is down 1.7 percent over the last four weeks compared to the same four-week period last year.

Jet fuel demand has been declining on a YOY basis for quite a while now. So why are airline stocks up?

I saw that the Great Bald One was on TV last night telling everybody to sell tech - apparently investors took that advice to heart this morning. The Dow and S&P started out in the green, but the Nasdaq has been in the red all morning, and now the big-cap brothers have come back down to join the techies. The major indices are all sporting red numbers, with the Nasdaq 100 down just over a percent, and the Russell 2000 near that figure. A/D lines are negative also, especially so on the Nasdaq side.

In the groups, we find retailers and homebuilders with slight gains, but bigger numbers on the red side, led by semis, computer hardware, networking, disk drives and HMOs.

Bonds are slightly higher, yields down just a few ticks. Energy prices are mixed and bouncing around after the weekly inventory reports. The dollar was higher early but has fallen back, leaving gold and silver near the flat line.

Big Ben is up on Capitol Hill blabbering this morning. I don’t pay much attention to such drivel, but I did catch one banner that was up on CNBC, apparently his idea of a solution to help save Social Security: “Older people should work longer.” Oh yeah. That’ll go over big with the voters. He should be glad he’s not an elected official.

Rob Hanna asks that question, and looks to earnings reactions for clues to the answer:

I wish I had the answer. My gut tells me that it’s likely to be a head-fake. Tech has been leading, and that is a good thing, but the run-up into earnings season is of some concern. In the last few days we’ve seen some huge haircuts to the prices of AMD (AMD) and Intel (INTC). Intel had risen nearly 10% so far this month before getting whacked last night. The report wasn’t all that bad, which implies to me that the stock had been pushed aggressively higher by those expecting something very strong. Apple (AAPL) is on tap tonight. Apple has risen about 20% in the last 2-3 weeks. It will likely take a pretty incredible report to provide any further significant upside. Even a big report won’t guarantee anything, as a pop higher tomorrow morning could be used as an excuse to take profits. Watch the action here closely as it should provide clues as to the type of action we may see over the coming weeks. It may also help us to answer the new leg up or head-fake question. As they say, it’s not the news, but the reaction to the news that’s important.

Rob’s report was written last night - today’s reaction to Apple’s earnings hasn’t been tremendously positive, sending AAPL down more than $4 after yesterday’s losses. AAPL has now dropped from yesterday’s high of 97.60 to the current price of 90.45 in the equivalent of one trading day.

Deron Wagner is watching the action in the Nasdaq pretty closely, as it threatens to give back last week’s breakout:

If the Nasdaq finds support at the 2,470 area in the coming days, it will confirm its recent bullishness, and could also offer low-risk entry points on strong ETFs that have pulled back to support as well. However, all bets are off on buying the tech sectors if the Nasdaq registers a firm close below 2,470. Note that intraday “stop hunts” below that level are to be expected, but the important factor is whether or not the index actually closes below support of its breakout level.

As for the S&P and the Dow, recall from the January 17 issue of The Wagner Daily that they remain at pivotal resistance of their multi-year highs. Yesterday, both indices probed to new highs on an intraday basis, but again finished the day below their respective resistance levels. The S&P Midcap 400 and Russell 2000 indices failed to test new highs yesterday, but both are still within striking distance of breaking out. The reaction to earnings reports from Apple, Merrill Lynch, Motorola, and other closely-watched companies in the coming days will determine whether the major indices “make it” or “break it” from here. Remember to trade what you see, not what you think!

The December housing starts data is bound to start another round of “bottom calling”:

In recent weeks, top Federal Reserve officials have said they detect signs of a possible bottom emerging in the weak U.S. housing sector.

But ‘06 was a pretty weak year when it comes to starts:

For all of 2006, housing starts fell 12.9% to 1.80 million, the biggest decline since 1991. Building permits likewise dropped, down 14.9% to 1.83 million, in the largest falloff since 1990.

Starts of single family homes fell 14.7% in 2006 to 1.46 million.

According to government claims, consumer prices rose 0.5% in December, but only 0.2% ex-food and energy. But despite their continued attempts to hold the number down, things haven’t gone that well over the past year, and that has the bond market rethinking those chances of a Fed rate cut anytime soon:

In 2006, the CPI rose 2.5% after a 3.4% gain in 2005. The core CPI rose 2.6% last year after 2.2% growth in 2005 and thus stands as the highest core inflation seen since 2001’s 2.7%.