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.

You wouldn’t think that this news out of China would be good for bond prices, and would lead to higher U.S. interest rates. Maybe this was a factor in today’s bond selloff:

China will soon create one of the world’s largest investment funds, with ramifications for global stock, bond and commodities markets and for how the U.S. finances its trade deficits.

Finance Minister Jin Renqing said on Friday the aim is to make more profitable use of its $1 trillion in foreign currency reserves that have piled up as it posted huge trade surpluses year after year. Most of those funds are now parked in safe, but relatively low-yielding U.S. Treasury securities and other dollar-denominated assets.

“We can achieve more profit from the investments,” Jin said at a news conference. “We are now preparing the organization of this new corporation.”

Of course, Treasury Secretary Paulson isn’t overly concerned:

U.S. Treasury Secretary Henry Paulson, in an interview this week on the U.S. television network ABC, rejected suggestions that changes in Chinese bond purchases could affect the United States.

Paulson said Beijing’s entire holdings represent the equivalent of less than a single day’s trading in Treasuries on global bond markets.

Well, what did you expect him to say? Secretly, I think he should be sweating bullets. The U.S. needs a continued flow of buying in Treasuries just to be able to keep making the interest payments on existing debt.

Today’s move in the bond market could be significant, at least in the near term. Bond prices took a dive, sending yields much higher, and moving them off the lows that they’d been lounging at for more than a week. Note that this low point in rates/yields is a little higher than the previous lows set back in early December.

Not all stocks have been participating in the “bouncing” action that has taken place this week. These Dow components have gone sideways at best — some have just continued to slide lower.

Charts courtesy of StockCharts.com

Once the early market gains had been given back, stocks fumbled around with the major indices dancing both above and below the flat line for the rest of the day. The large cap indices went nowhere, while the small and mid-caps were able to hang onto a bit of a gain:

Bonds took a tumble, sending yields much higher. It looks as though yields may have put in a near term low after moving sideways for more than a week:
6-month: 5.13%    2-yr: 4.67%    5-yr: 4.54%    10-yr: 4.59%   30-yr: 4.72%.

Market internals were mixed, with a big divergence on the Nasdaq, and volume was once again uninspiring. Advances/declines were 3 to 2 on the NYSE and 5 to 4 on the Nasdaq, with up/down volume 5 to 4 on the NYSE but 2 to 3 on the Nasdaq. New highs/lows were 75/28 on the NYSE and 75/75 on the Nasdaq.

Group movement was muted, with REITs (+1.3%) and steel stocks (+1.1%) leading the winners, and HMOs (-1.0%) bringing up the rear.

Energy prices were lower. Crude oil prices fell more than a dollar-and-a-half to $60.05/barrel, gasoline dropped back to $1.90/gallon and natural gas slid to $7.08/mmBTU. The dollar index gained just a bit more ground, to 84.25. Gold was flat at $651/ounce, but silver slipped a dime to $12.82/ounce.

BMB Note: Not much of interest today, with more light volume nothingness. What could be the most significant move came in the bond market, where bond prices took a dive and sent some of the longer-term Treasury yields up more than 10 basis points.

Hard to make much of a case for buying anything here. I’m still of the belief that this bounce will fizzle, and we’ll make another move down to at least test the recent lows. If those lows are broken, then another leg down is almost certain. On the other hand, if the market can firm up here and make a big volume move higher, maybe this will prove to be just a very sharp, short correction.

Your guess is as good as mine. For now, I remain on the defensive, and am watching this bounce carefully to see where the best short setups may be presenting themselves. Right now, some areas are looking rather ripe for the picking, like the brokers and the REITs - that is IF the bounce mode ends and the downward momentum resumes. Time will tell.

There will be some economic reports out next week to chew on that could move things around a little, like retail sales numbers, PPI and CPI. Nothing like a few numbers, whether meaningful or not, to keep things stirred up.

While their organizational bosses continue to talk up the supposed ’strength’ in the housing market, the fact is that the realtors down in the trenches want to see lower home prices - to help get business moving again. From the Palm Beach Post, via The Big Picture:

“A growing number of Realtors in Florida are frustrated with the state and national Realtors groups’ efforts to ’spin’ the market as one that is strengthening and where home prices are stabilizing.

“Many (though probably not yet most) Realtors are frustrated by customers who continue to list their homes at price levels that are ‘unrealistic,’ and as a result, sales volumes - and thus commissions - continue to remain depressed.

“While Realtors have noted to customers that many home builders in Florida have slashed new-home prices in order to move bloated inventories, many home sellers are still holding off, hoping - along with FAR and NAR - that prices will start moving back up soon.”

A few blurbs from Larry McMillan’s weekly comments on the current market action:

So much has happened in the past 10 trading days that one could justify a myriad of outlooks. However, we feel that the overriding theme is that major damage was done to wallets and psyches last week, and that kind of damage takes time to repair. Thus, while sharp, but short-lived oversold rallies can spring up to counter declines, we think that — at a minimum — there will be a retest of this week’s lows. And, if that retest doesn’t hold, lower prices will result before another retest takes shape. These thoughts, of course, are in line with the feature article this week. Cynics say that no one makes money in bear markets — not even the bears — because the reflex rallies are so violent and strong that they take the bears out of their short positions. There is some truth to that, as I’m sure that the 35-point $SPX rally we’ve seen off the Monday lows has forced some bears to cover. CNBC’s incessant cheerleading is a further misleading indicator, that also makes it tough to stay short.

***

Market breadth was abysmal during the decline. Look at the “stocks only” data for the day of the big decline — February 27. Only 59 optionable stocks advanced, while 3,211 declined! That’s an unheard-of ratio. There has never been a day with that much one-sided market action in history. This clearly reflects the herd-like nature of today’s money managers, many of whom are running hedge funds. Some say that this dismal breadth was the unwinding of the “Yen carry trade,” as those who had borrowed cheap Yen over the years were heavily invested in the stock market, as well as commodities such as gold, and everything had to be sold when the Yen had to be bought back. However, just a few days later, when the reflex rally unfolded, advances swamped declines (2,898 advances vs. 191 declines in “stocks only” data). NYSE breadth eventually gave a buy signal, although “stocks only” has not.

Finally, volatility skyrocketed, as $VIX nearly doubled. But it has now retreated dramatically. A spike peak in $VIX is a buy signal, and therefore we grade $VIX as bullish after closing below 15 today.

Does this mean we should rush out and buy the market? No, for the first reflex rally often comes with buy signals from $VIX and from breadth. But the more intermediate-term indicators — the equity-only put-call ratios and the $SPX chart — don’t roll over so easily, and so we wouldn’t turn bullish until at least one of those turns positive as well.

Deron Wagner is watching for breaks of the recent bounce’s short-term uptrend lines for signs of another move lower. And he cautions that it is unlikely that we’ve already seen a ‘bottom’:

Obviously, the major indices could stage a rally attempt to their 50% retracement levels before moving lower, but there’s no harm done if they do. If you’re not already short, simply wait for confirmation of the uptrend line breaks. If you’re already short and can’t take any more pain of a further bounce, just close the position and wait for a re-entry below its uptrend line. Regardless of how long it takes, the key point is that markets very rarely recover from a sell-off of last week’s intensity only a week or two later. Generally, it takes at least two or three months to begin seeing signs of institutional accumulation once again.

With bonds moving lower this morning and yields bouncing back up to their highest levels in more than a week, you might take time to browse through Martin Goldberg’s market commentary from last night concerning trends in bonds and yields.

Much of the early gains were given back rather quickly, but things seems to have settled down a bit with the major indices just above the flat line. A/D lines have come way down from lofty early levels, but remain in the green. A majority of groups are still in positive territory, but without many big movers. Paper stocks and semiconductors lead the winners, while the homebuilders are at the end of the line.

Bonds have taken a fall, and that has yields jumping higher. Energy prices are lower, the dollar is trying to push higher. Gold is near flat, with silver lower.

I’m not big on these government jobs reports, especially since much of the number is pure conjecture instead of absolute counting. But a gain of 97K jobs seems a little on the weak side, even though we get another slight drop in the unemployment figure:

The drop in the unemployment rate to 4.5% from 4.6% was unexpected. The unemployment rate has drifted between 4.4% and 4.6% for six months.

The jobless rate fell to 4.5% because fewer people were in the labor force, not because fewer were unemployed. According to a survey of 60,000 households, the labor force fell by 190,000 in February, with 38,000 fewer employed. Unemployment fell by 152,000 to 6.9 million. The labor participation rate fell to 66.2%.

Take it for what it’s worth. Probably not much.