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 have no idea who this Bill Whittle guy is (I’ll have to find out), but he’s got a way with words. I’d heard a little about Rosie O’Donnell running off at the mouth - again - and pretty much passed it off as, well, you know, Rosie O’Donnell running off at the mouth. What’s new?

But Mr. Whittle has spent some time trying to make sense of all the people that don’t seem to make sense:

Recently, Rosie O’Donnell said on national television that she believes 9/11 was orchestrated by the US government.

Well, that’s why we went through the steps above. If you believe that the government lied about the moon landing, you can believe they lied about killing JFK. If they lied about JFK, then they can lie about chemtrails. And if they are willing to poison the entire population with aerial spraying, what are a few thousand people in four airliners and a couple of buildings?

Rosie O’ Donnell making such a claim on a major network is a national disgrace. The fact that much of the audience cheered and applauded is nothing less than a national catastrophe.

To her, and to her audience, it is taken as granted that the government is capable of such things. As if “the government” was operated by cyborgs grown in Haliburton vats, rather than by well-meaning and patriotic people that love this country.

“This is the first time in history that fire has ever melted steel,” she said. This is a statement of such pristine and perfect idiocy that it surely must be emblazoned in stone across the entrance to the Physics Imbecile wing of the Moron Museum of Natural History. But mastery of physics and engineering requires some intelligence, some perseverance and some discipline: none of which are in evidence in this buffoon. Everything is a conspiracy to a mind this far gone. The 15 British sailors kidnapped at sea? All a plan by our evil (but incompetent!) government to get the next war it so desperately needs. “Gulf of Tonkin! Google It, people!” she said on national TV.

And I will, Rosie. I promise. As soon as I finish googling MAD COW DISEASE.

I will make the point yet again because I believe it is the crux of the issue: what kind of moral universe do you have to inhabit to be able to believe that your own people – airline personnel, demolition experts, police and security forces, faked witnesses and all the rest – are capable of such a thing? How much hate for your own society do you have to carry in order to live in such a desolate and ridiculous mental hell? What psychoses must a mind be riddled with in order to negate what was perfectly obvious and instead believe a theory of such monumental fantasy? How much pure constant hatred does that take?

What, in short, is the miserable black hole of self-loathing that drives a person like Rosie O’Donnell and millions like her?

Now and then, it is quite refreshing to find a voice of reason.

Thanks to Little Green Footballs.

I will grant you that many people will label Peter Schiff as a ‘gloom and doomer’, and we can all hope that our economic future is not nearly as dark as the picture he often paints. But much of the content of his column this week is simply factual, and facts aren’t up for debate. And that means the dollar is in trouble, again:

The dollar is no longer responding to traditional stimulants. This week, despite the apparently “hawkish” tone in the recently released Fed minutes, and trade deficit figures that were slightly less horrific than expected, the dollar nevertheless declined against just about every currency on the planet. As a result, it now teeters dangerously close to the edge of a very large precipice. Looming large is the 80 level of the U.S. Dollar Index which has stood as long term support for almost thirty years. This week, the Index broke below 82, and is sinking fast. When this critical level is breached, look out below. Without any support beneath it, the dollar could literally fall off a cliff.

***

For individual currencies, the British pound warrants particular attention as it approaches the significant two-to-one level against the dollar. The pound currently trades for about $1.99, and has not meaningfully breached $2.00 since the early 1980’s. The euro, currently trading above $1.35, is bumping against its all time high of just under $1.37 against the dollar. The Australian dollar has already hit a new 17-year high and is perhaps a harbinger of things to come. The sole laggard among major currencies has been the Japanese yen (and to a lesser extent the Swiss franc), which has been held down by the infamous carry trade. When it unwinds (which would clearly be evidenced by a break below the 110 level), buckle your seat belt as all that will stand between the dollar and oblivion will be the Bank of China.

On that note, yesterday the Bank of China quietly dropped the bombshell that its foreign currency reserves, which had just passed the $1 trillion benchmark a few months ago, had swelled in the first quarter of 2007 to more than $1.2 trillion. At this rate, China will amass more than $2 trillion dollars in reserve sometime next year. I can only imagine how low the dollar would already be were it not for the massive foreign aid provided by the Chinese.

So far the Dollar Index has tested the 80 level five times in the past: 1978, 1990, 1992, 1995, and 2004. On several of those occasions it took massive, coordinated interventions by all the world’s central banks to rescue the dollar. However, given the enormity of today’s imbalances and the sheer number of dollars in foreign hands, such a bailout seems unlikely.

Perhaps the most significant warning sign is the break out in the price of gold. This is the first time the Dollar Index has hit this level with gold trading above $400 per ounce (although it might have been slightly above that level in 2004). Of course gold was considerably above $400 per ounce in 1980, but it was only about $200 per ounce in 1978. Though the dollar was under pressure in 1980, the index itself only fell to about 85. Currently, spot gold is trading at about $680 per ounce.

BMB noted just the other day that the current rise in interest rates here in the US hadn’t done anything to help prop up the sagging dollar, but the relationship between the dollar and rates is a constant chicken-and-egg type of problem. Maybe that sagging dollar is finally having the effect of lessening demand for US Treasuries - less demand means lower bond prices and higher rates.

	A sharp move up off the March lows, less than a month in duration, has the major indices within earshot of the Feb. highs.
	Bonds, however, are a different story. According to intermarket principles, bonds generally move in the same direction as stocks, but the bond market tends to change direction ahead of stocks. That’s why it will be important to keep an eye on the bond market to see if this trend downward continues. Sinking bonds, bringing higher interest rates, will not be good for stocks longer term.
	The Nasdaq was sputtering around just below the flat line most of the day - and just below recent resistance at 2480 - when this news came out. The COMP ramped 10 points in no time, as you can see by this 10-minute chart, and CSCO jumped a buck. When the market’s in a happy mode, it doesn’t take much.
	The drug stocks have rocketed off their March lows and are back at the January highs. Thanks to MRK, ABT, LLY, SGP and WYE.
	Recent dollar weakness has been very kind to the precious metals. The GLD is also back up near its Feb. highs.

Charts courtesy of StockCharts.com

Selloff? What selloff? Oh, was there a selloff on Wednesday? The market didn’t seem to notice.

Wednesday’s selloff has been ignored, and the February 27th drop is a distant memory, as the Dow gained ground for the 10th time in the last 11 days, but the Transports and Utilities apparently weren’t invited to play along. Merck held the Dow up most of the day, and then Cisco pushed the Nasdaq up late to add to the festivities:

Bonds still are not cooperating with stocks, though stocks haven’t seemed to notice yet. Bonds were lower again, and yields moved to new relative highs:
6-month: 5.08%    2-yr: 4.76%    5-yr: 4.69%    10-yr: 4.76%   30-yr: 4.93%.

Internals were positive, but volume was off a bit from yesterday and again lighter than Wednesday. Advances/declines were 11 to 8 on the NYSE and 3 to 2 on the Nasdaq, with up/down volume near 2 to 1 on both. New highs/lows were 235/16 on the NYSE and 168/40 on the Nasdaq.

Most groups were higher, but the big winners were somewhat limited: gold and silver stocks (+2.3%), drug stocks (+2.3%), health care (+1.3%), metals and mining (+1.3%), networking (+1.1%) and health care products (+1.1%). The homebuilders (-0.9%) led the losers.

Energy prices fell, with crude oil dropping to $63.45/barrel, gasoline slipping a couple of cents to $2.17/gallon, and natural gas losing 15 cents $7.79/mmBTU. The dollar index tagged the 82 mark to the downside, then rallied, but fell back to 82.17. Gold and silver enjoyed the dollar weakness, with gold rising to $685/ounce, and silver moving back above 14 to $14.01/ounce.

BMB Note:Another up day. They’re becoming so common these days that you probably aren’t surprised - after all, the Dow has been up 10 of the last 11 days. But the pattern of light-volume up and higher-volume down days is still of concern. Unless that pattern changes and we get some strong volume on the up days, the rally’s staying power must remain in question.

Big day for the drug stocks, as Merck gives a turbo boost to the group, which had already been acting pretty well - with a few exceptions. The precious metals stocks were strong today, as gold and silver prices continue to climb right along with stock prices. And the homebuilders? Well, they get no love at all. At least not for now. But their cousins, the REITs, did bounce back a bit today after a couple rough days.

The major indices broke above the recent days’ resistance levels, and have the Feb. highs in sight. Are new highs in store? Will there be volume to support the move? We’ll see. The G7 meets this weekend, and folks are wondering if other countries will complain about Japan’s “weak Yen policy”. As long as the Yen stays weak and BOJ rates stay low, the ‘carry trade’ will be alive and well to help support asset prices globally. My guess is as long as markets around the world continue to rise, the central banks and governments will just watch with glee. Game on! (For more on the carry trade, check out the article that David mentions at Finance Trends Matter.)

Next week’s economic news will include CPI (today’s PPI wasn’t that great, but not that bad, and consumer sentiment dropped, but the market didn’t care), housing starts and lots of earnings reports. And it’s also options expiration week, which has tended to give a bit of a bid to the market lately - as if it really needs any more of a bid than it already has.

An extremely lethargic performance from Mr. Market so far today - indices flat, A/D lines flat, and volume tailing off fast. Good ol’ Merck is holding the Dow in the green all by itself.

Not much else is happening, except for another pop in the precious metals.

As long as the chart continues to point up and his indicators remain on the bullish side, Larry McMillan’s stance won’t change:

Last month’s sharp market selloff is still having some lingering effects on the stock market. Namely, a lot of people turned bearish at that time and still haven’t turned back to bullish yet. As long as they remain skeptical, we think this market will continue to rise. It will only be when they convert back to bullishness that the market will be in danger.

$SPX has now carved out a nice pattern of higher highs and higher lows on its chart. The trend line connecting those lows is at about 1430, and that should represent short-term support for the index. Major support is below that, at 1410. We expect the index to challenge its recovery highs at 1460. The $SPX chart is bullish, and a breakout above 1460 would likely bring a flood of money back into the market…

In summary, we have no sell signals from our indicators, and with the $SPX chart and the put-call ratios being quite bullish, we look for higher prices to prevail. This is one of those markets where the $SPX chart is one of the best indicators, so that is the main thing to watch now. As long as its uptrend remains intact, the bears really don’t have a case.

An initial move higher has been given back, and now the major indices are hanging slightly in the red, as are the A/D lines. If not for a 3.40 move up in MRK, the Dow would be much worse off, considering that stock is worth about 27 Dow point right now…

With help from that move in MRK, the drug stocks are leading the winning groups, along with the gold stocks. The losers are being led by the semiconductors and retail.

Bonds are a little lower, yields higher. Energy prices are slightly lower. The dollar is lower, gold and silver have moved higher.

Using the biotechs as an example, Deron Wagner says that you have to be careful, as not all sector ETFs are created equal.

On the broader market:

The only thing missing from yesterday’s bullish reversal was higher volume. Total volume in the NYSE receded 6%, while volume in the Nasdaq came in 3% below the previous day’s level. Considering that Wednesday was a bearish “distribution day” of higher volume losses, it’s negative that stocks bounced back on lower turnover. Nevertheless, despite Wednesday’s institutional selling, overall turnover has remained below average for several weeks. The NYSE has had fourteen consecutive days of lighter than average volume. Similarly, volume in the Nasdaq has registered below its 50-day average for fifteen straight days. This tells us that institutional traders, both bulls and bears, have remained largely on the sidelines. Frankly, we can’t blame them, as the market could rapidly move in either direction from these pivotal levels.

***

In yesterday’s newsletter, we illustrated how the major indices closed Wednesday’s session at or just above substantial support levels and predicted a tug-of-war between the buyers and sellers in the coming days. Looking at charts of the past two days, one could definitely conclude there is some arguing going on! Unfortunately, yesterday’s gains put the major indices in “no man’s land,” trapped between the numerous support levels we outlined and resistance of last week’s highs. The Nasdaq actually closed just above last week’s highs, but not by a wide enough margin to definitively declare a breakout to another leg up. The reaction to the onslaught of corporate earnings reports over the next several weeks are likely to be the determining factor of the market’s next move.

And we get options expiration next week…

The PPI number came in somewhat tame, since the ‘core’ rate was unchanged - never mind the 1% headline jump if you include the unnecessary items like food and energy.

In other news, the US trade deficit declined slightly.

The initial reaction sent index futures higher, which have since moderated a bit.