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.

I know I’m digging up some older news, but I’ve been way out of my routine when it comes to following the markets. A lot has happened these last 10 days or so, and I’m just trying to get caught up…

John Mauldin brings us George Friedman’s (of Stratfor.com) interesting account of the action in the Chinese market on Feb. 27, and the subsequent reaction in many of the other world markets. He describes it as an “engineered drop”:

China’s Shanghai Composite Index tumbled 8.84 percent Feb. 27, its largest fall in a decade. Its sister index, the Shenzhen Composite Index, fell 8.54 percent. The size of the drop in China is not significant in and of itself. On a number of occasions during the past year, the Shanghai Stock Exchange has experienced 5 percent plus daily reductions, and it has already boomed and busted once this decade.

But that hardly means the development is insignificant. The fall is important both for how it happened and what it triggered.

How it Happened

This was an engineered drop.

The Chinese government has become increasingly concerned about levels of investment in its economy or, more accurately, the sheer amount of money that is chasing projects. State firms with limitless access to subsidized capital from state banks have used that access to launch thousands of nonprofitable firms. This glut in “investment” money drives up the cost of commodities and adds industrial capacity without actually producing anything of much use, making life more difficult for the average Chinese and unduly harming relations with foreign powers that face a glut of otherwise noncompetitive Chinese goods.

This penchant for overinvestment has now spread to the stock market in two ways. First, the same politically connected government officials who started dud companies are taking out loans to buy shares, or are using shares they already hold as collateral for new loans. Second, ordinary Chinese citizens have started borrowing — sometimes against their homes — in order to play the market. In January, the number of total traders on the Chinese exchanges grew by 1.38 million, an increase of 134 percent from a month earlier, while stock turnover was up 700 percent from a year earlier.

The net result is an absurd stock surge with no basis in fundamentals. At present, some Chinese banks now have price-to-earnings ratios higher than financial behemoths such as Deutsche Bank and Chase, despite deplorable management and a history of highly questionable lending policies.

For the past few months, the government has been working to drive down this speculative investing. On Feb. 26, China’s State Council launched a new “special task force” that accurately could be referred to as the “get-those-idiots-to-stop-borrowing-to-gamble-on-the-stock-exchanges” team. Its express goal is to get the Chinese domestic security brokers to lay off such speculative decision-making, while also putting a crimp in the source of the subsidized capital.

Day one started by the script, and Beijing is likely quite pleased with the way things are going (or at least it was until its actions unintentionally triggered a global meltdown). Also, since the Shanghai exchange is actually still up 3 percent for the past week despite suffering its largest drop in a decade, the State Council probably hopes for more drops in the days ahead.

Thanks to David at Finance Trends Matter. Check out his Features of the Week.

It probably doesn’t come as a huge surprise that some of the more interesting first-thrust/pullback type setups that are showing up on the long side are in the short/ultra short index ETFs. These could provide some opportunities if the market should begin to falter and make another leg down:

Charts courtesy of StockCharts.com

More messes for New Century Financial, the subject of bankruptcy rumors today. Apparently they’ve gotten some financing to keep their head above water - maybe - but they’re not taking new loan applications:

New Century (NEW) got $265 million in financing, calming rabid speculation on Wall Street that a bankruptcy filing was imminent.

But the company said in a regulatory filing it had stopped accepting loan applications as its lenders clamp down on the company’s borrowing. New Century said it “has only been able to fund a portion of its loans this week,” and “its capacity to fund new originations is substantially limited due to its lenders’ restrictions or refusals” to extend credit.

	Let’s be honest. There isn’t a lot of good going on in the market at the moment. No matter how you slice it, the uptrends off the July lows have been broken pretty convincingly, and the 50-day moving averages have turned down.
	One group that has escaped - thus far - without a great deal of damage from the recent selloff has been the oil services.

Charts courtesy of StockCharts.com

Not a horrible day for stocks, considering the way things have been going the past couple of weeks, but not a very convincing one either. Though the indices continued to bounce higher out of oversold conditions, volume was less than impressive, and prices came well off their best levels of the day:

Bonds have remained strong, and that has kept yields trapped at multi-week lows:
6-month: 5.08%    2-yr: 4.56%    5-yr: 4.45%    10-yr: 4.51%   30-yr: 4.65%.

Market internals were postive, and volume fell just slightly on the NYSE while ticking up a bit on the Nasdaq. Advances/declines were 7 to 3 on the NYSE and 3 to 2 on the Nasdaq, with up/down volume 7 to 3 on the NYSE and 2 to 1 on the Nasdaq. New highs/lows were 105/22 on the NYSE and 71/80 on the Nasdaq.

The groups were nearly all higher, with steel stocks (+3.5%), semiconductors (+1.8%), metals and mining (+1.7%), REITs (+1.6%), brokers (+1.5%), chemicals (+1.3%), retailers (+1.1%) and oil services (+1.1%) leading the way.

Energy prices mixed, as crude oil fell a few cents to $61.64/barrel and natural gas slipped to $7.24/mmBTU, but gasoline prices continue to rise, hitting $1.93/gallon. The dollar index regained some lost ground to 84.17. Gold slipped a bit to $651/ounce and silver slid to $12.92/ounce.

BMB Note: Despite today’s gains, the market looks to be in pretty rough shape. The major indices remain well below their 50-day averages, and while the Dow was up more than 100 points early, it was on relatively light volume. In early afternoon, the Dow dumped about 70 of those points in 20 minutes time, and that’s when we saw volume accelerate. That didn’t look real encouraging to me.

Stocks appear to be in light volume bounce mode for now, and if that remains the case, we could be setting up for another move lower. The O’Neil followers are watching to see if we get a “follow through” day off the lows of early this week, and if that does occur, my opinion would likely change. Until that time, however, I would remain very defensive, and would have stop points in mind to exit any open long positions should the market decide to head lower again.

Stops can be a wonderful thing. Knowing that I would be unable to watch the market closely over the past week or so, I had stops in place to protect me from taking big losses should the market turn. And turn it did - the stops took me out of the few positions I had open, and my butt was saved from some nasty action.

Protect your profits, protect your capital, and never lose big.

An interesting chart perspective brought to you by The Kirk Report via The Big Picture.

Deron Wagner is looking at bond ETFs for opportunities, and monitoring the ‘bounce’ in the major indices by watching the Fibonacci retracement levels.

If you’re not familiar with the Fibonacci level concept, follow the link in Deron’s article for a primer.

Hey, you gotta give the guy credit. At least he calls it like he sees it.

Then again, if that’s the way the company CEO describes the outlook for ‘07, maybe we should be wondering how bad it’s really going to be…