Bear Mountain Bull

For all the talk of huge short interest and abundant bearish sentiment available to help push stocks higher, the folks at Sentimentrader.com seem to think that maybe the bulls are the ones that are snorting a bit too loudly:

Update: Geez, talk about confusing. Remind me that if I ever were to subscribe to that site, I need to ask which browser they’re doing sentiment charts for. I see two different things, one with Firefox and one with IE7. On top of that, I don’t see the carets at all, just little boxes, with IE6. A little something for everybody, I guess.

Firefox version	IE7 version

	The Trannies finally break free.
	The Brokers are the next surfers up on the buyout wave.
	The Networking stocks are riding a wave of their own, for no real reason at all. But who needs a reason these days?
	And very quietly, away from all the noise, short-term rates are giving us their opinion of the economy as they fall off a cliff.

Charts courtesy of StockCharts.com

More merger mania helped get things going in the morning, and the market tried to follow through a bit on yesterday afternoon’s runup, but it was turned back and had to settle for just a ‘little’ up day. Never mind that the Dow was down five points - it still wasn’t a bad day for most stocks, and the Trannies broke free of their recent range:

The bond market slumped early, but rallied back for little change, except on the short end, where the 3-month yield (not shown here) took another big tumble:
6-month: 4.94%    2-yr: 4.92%    5-yr: 4.85%    10-yr: 4.89%   30-yr: 5.01%.

Market internals were positive, and volume put in a big spike at the end of the day - the end-of-month effect, perhaps? Advances/declines were about 5 to 4 on the NYSE and shy of 3 to 2 on the Nasdaq, with up/down volume 5 to 4 on the NYSE and 13 to 7 on the Nasdaq. New highs/lows were 347/28 on the NYSE and 219/36 on the Nasdaq.

The brokers (+3.6%) were the big winners in the merger lottery today, and they were followed up by gold and silver stocks (+2.7%), networkers (+1.7%), semiconductors (+1.4%) and transportation (+1.1%). Oil services (-0.7%) led a short losers list.

Energy prices were mixed, with crude oil up to $64.01/barrel, gasoline backing down to $2.25/gallon, and natural gas holding flat at $7.94/mmBTU. The dollar index fell back to 82.29. Gold gained 8 bucks to $661/ounce and silver had a a strong day, gaining a quarter to $13.41/ounce.

BMB Note: The trannies finally join the party a bit, the brokers are the latest beneficiaries of the buyout rampage, and the sagging semis and gold stocks come to the front of the line.

Despite continually over-stretched conditions, despite the six Nasdaq distribution days over the last month, and despite the morning’s horrid GDP number, the market continues to thrive on speculation and merger mania. There is little that can be analyzed logically, either fundamentally or technically. Until that behavior stops, things aren’t going lower. Plain and simple. Of course, the market could change its mind at any time. That’s the tough part.

A slew of data out tomorrow, including the June payrolls, personal income and spending, consumer sentiment, and auto and truck sales. I’d say the numbers matter, but I don’t think they do. Even cow patties have a silver lining these days. Matter of fact, I think there are merger rumors being floated in the pastures as we speak…

I see CNBC is running a piece now, and the banners on the screen read “Banking on Buyouts” and “The Next Buyout Target” - and a list of about 7 companies is displayed.

Guessing which will be the next company/stock to be bought out. That’s one hell of an investment “strategy” - but that’s what this market has come down up to.

I wish you luck.

Does this look like a bottom to you?

A rather frenzied open has quieted down, and leaves the majors showing modest gains thus far, and A/D lines remain in the green. In the groups, the brokers lead the way on the never-ending buyout noise, followed by the gold stocks, networkers and metals.

Bonds are falling again, and rates are now testing January’s highs. Energy prices are fairly flat, the dollar index is bouncing back after an early dip, and gold and silver are higher.

Construction spending increased 0.1% in April, and the Chicago PMI index rose more than forecast.

This is a good thing.

In the second look at Q1 GDP, it came across looking even worse than the first time around:

The U.S. economy slowed to a crawl in the first quarter, held back by falling investments in homes, shrinking inventories and a large trade gap, the Commerce Department reported Thursday.

The economy grew at a 0.6% annualized pace in the quarter, revised down from the initial estimate of 1.3%, the government said in its second estimate of quarterly gross domestic product. It was the slowest growth since late 2002.

These are some pretty lousy numbers - but so far, the market doesn’t seem to care. All it cares about is more mergers.

BMB mentioned earlier that foreigners now hold 80% of US debt due in 3-10 years. But what does it mean?

Kevin Depew takes a stab at that answer:

• First off, there’s this: an article this morning on Bloomberg noted that foreign investors now own a record 80% of the U.S. Treasury notes due in three to 10 years.
• According to a 2005 Federal Reserve study by Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville, long-term interest rates in the U.S. would be about 1.5 percentage points higher without foreign capital flowing into our Treasuries.
• Ok, so what? They like our debt. That’s a vote of confidence, right?
• On the bright side, the answer is “yes.” But think for a moment about a situation where you own someone else’s debt.
• Beyond the fact that you’re loaning money to someone who pays you for the use of it, what exactly does that mean?
• If that’s too difficult to conceive, then think about what it means when you owe someone else money?
• Being in debt removes a layer of autonomy in your decision making.
• Try selling your car with a lien attached.
• The fact that so much of our debt is owned by foreign interests means we have less control over our own decision-making.
• In fact, on the scale of the the U.S. Treasury market, it means the U.S. could conceivably even be held hostage by economic decisions made in places like Beijing, or Tokyo.
• According to Alan Taylor, a professor of economic history at the University of California, Davis, not since the 19th century have foreigners held so much American debt.
• Back in those days we were an emerging market.
• That debt financed small little ventures such as the Louisiana Purchase and the westward expansion, the construction of railroads, canals, infrastructure projects.
• By comparison, what’s our debt financing today?

	The S&P finally put in a new all-time closing high today, but I doubt that CNBC will be willing to do away with their annoying orange banner. The SPX came just shy of breaking through last week’s intra-day high.
	The Transports are still doggin’ it. They’re not giving up and rolling over, by any stretch, but they are still having trouble moving higher.

Charts courtesy of StockCharts.com

It just gets whackier by the day, doesn’t it.

When people saw this morning that the Shanghai Composite had dumped 6.5% overnight, I doubt that this is what they expected to see here in the US by the end of trading. Things had worked back to flat by midday, and the market used the release of the Fed minutes as an excuse to rally into the close:

The bond market was up early, but fell back to finish near flat:
6-month: 4.97%    2-yr: 4.89%    5-yr: 4.83%    10-yr: 4.87%   30-yr: 5.01%.

Market internals were positive, and volume picked up over the last couple of days, but that’s not saying much. Volume is still coming in lighter on the up days than on the down days, but those down days still seem few and far between. Advances/declines were 13 to 6 on the NYSE and 5 to 4 on the Nasdaq, with up/down volume 3 to 1 on the NYSE and 7 to 3 on the Nasdaq. New highs/lows were 178/38 on the NYSE and 150/61 on the Nasdaq.

The groups ended up mostly green: REITs (+2.6%), oil services (+2.4%), steel stocks (+2.3%), metals and mining (+1.8%), oil stocks (+1.6%), computer hardware (+1.6%), commodities (+1.6%), natural gas (+1.6%), brokers (+1.6%), disk drives (+1.3%) and telecom (+1.3%).

Energy prices were mixed, with crude oil up $63.49/barrel, gasoline down a few cents to $2.27/gallon, and natural gas prices back up to $7.94/mmBTU on a contract rollover. The dollar index moved back up to 82.43. Gold slipped a few bucks to $653/ounce but silver was up a couple of cents to $13.16/ounce.

BMB Note: I’m not even going to make believe that I understand what’s going on with this market.

There are times when I am glad that I am not responsible for managing other peoples’ money, that I am not paid for investment advice, and that I am not forced to chase performance for fear that someone will post better returns than I do. This is one of those times.

On tap for tomorrow is Q1 GDP - the first ‘do-over’ - Chicago PMI and construction spending.

That would be, in debt to foreigners. At least for the next three to ten years:

For the moment, at least, financing the U.S. budget deficit may be getting less arduous as foreign investors now own a record 80 percent of the Treasury notes due in three to 10 years.

Not since the 19th century have foreigners held so much American debt, said Alan Taylor, a professor of economic history at the University of California, Davis. International investors own $672 billion of the $835.4 billion Treasuries due in three to 10 years, according to research by Lawrence Dyer, a New York- based strategist at HSBC Securities USA Inc., the investment banking arm of HBSC Holdings Plc in London.

The question is: What happens when they get tired of being paid interest in dollars that are continually declining in value?

The minutes from the latest Fed meeting say that they’re still worried about inflation (here’s the full text if you’re really bored). Of course they are - they know exactly how much money they’re ‘printing’ on a daily basis to keep this ship afloat. And they know full well what the ramifications are. But that doesn’t stop them.

Hey, the markets are happy. Just keep printing, but make sure you talk tough.

There’s been a lot of talk about the level of short interest flying around, and as everything else is these days, is viewed by many as a bullish indicator. But as The Big Picture points out today, there are those that say that, in these days after the proliferation of hedge funds, that number doesn’t matter so much anymore.

The bulls say:

“Ultimately you have to cover the short positions and that tends to create more of a buying frenzy,” said Andy Engel, co- manager of the Leuthold Core Investment Fund, which has outperformed 99 percent of similar funds over the past five years…

***

“The last time we were here there was bloody optimism everywhere and enthusiasm about the future, and everything was going to go up,” said Paulsen, chief investment strategist at Minneapolis-based Wells. “Today it couldn’t be any more opposite. It’s a pretty good environment.”

As if we don’t already have a “buying frenzy” in full swing. And I do hear quite a bit of “bloody optimism” too - yesterday the discussion on CNBC was about Dow 15,000 - last I checked, we hadn’t reached 14,000 yet.

And when you say “ultimately you have to cover the short positions”, yes that’s true. But many times short positions are covered at bottoms - the shorts might not feel compelled to cover if the market doesn’t continue to move higher, which isn’t a foregone conclusion. Except in the minds of the bulls, of course, in which case the market never goes down.

Then there are those that are of the opinion that the short interest numbers can’t be interpreted quite the same as they used to:

But with hedge funds cutting a much bigger swath in the market, today’s high level of short interest doesn’t represent the bearishness that it did in the past. Many hedge funds engage in a strategy of offsetting the purchase of shares in one company by shorting another, betting that it will perform worse than the stock of the company that they own. Then there is the booming deals market, which drives merger arbitrage, where investors buy shares of companies set to be acquired and short the acquirers.

Because this short-selling doesn’t represent real bearishness, says Bollinger Capital Management President John Bollinger, short interest no longer says much about what the mood of the market is. “Hedge fund activity has destroyed the usefulness of the numbers,” he says.

Hmm. I have no idea who is right. But let’s just say that I don’t think I would take an opinion opposite somebody like John Bollinger very often…

Jeffrey Cooper today:

…the typical timing of blow-off runaway markets lasts three or four months. Counting from the low close of March 5th, that projects to a window worth watching between June 5th and July 5th. Counting from the intra-day low of the spring shakeout of March 14th, it projects to June 14th to July 14th.

Ron Griess, of TheChartStore.com, did an interesting study where he showed how the current chart looks eerily similar to the bottom and final thrust into the ultimate top in both the 1942 to 1946 advance and the 1982 to 1987 cycle. The final thrust in 1946 lasted 77 trading days. The final thrust in 1987 lasted 67 trading days. The current thrust started on March 6, 2007. 67 trading days equal June 8, 2007. 77 trading days equal June 22, 2007.

This is interesting when you consider that next year’s estimates for the S&P are around up 20% on a conservative basis The point is of course, that Hoofy has done a great job proselytizing a lot of bears – even some famous ones. The point is of course, that the favorite pastime on the Street is extrapolating the current run ad infinitum. The favorite sport is extrapolating the present into the future. It has always been this way. The engine of momentum pulls the caboose of complacency.

However, in my experience if it seems too good to be true, it probably is.

The China syndrome hasn’t hit the US markets too hard, as the major indices loiter just below the flat line, although A/D lines are probably slightly worse than the indices might indicate. In the groups, the REITs are the big winners of the day again, as they continue to float on the buyout bubble - they are the only groups showing even moderate gains. Semiconductors and transportation stocks lead the downers.

Bonds are lower today, yields higher. Energy prices are fairly flat. The dollar is a little higher, gold and silver are lower.

The Shanghai Composite index dropped 6.5% on the tripling of trading taxes, but the reaction in other markets hasn’t been as severe as we saw back in Feb.

In other Asian markets, the Hang Seng fell 0.9%, and Japan’s Nikkei dropped 0.5%. European indices are down in the neighborhood of 1%, and US index futures are lower pre-open.

Merger mania rolls on, and homebuilder Pulte cuts jobs.

If at first (and second, and third) they don’t succeed in cooling their markets, they will try, try again:

China tripled the tax on securities transactions after interest-rate increases and government warnings failed to douse a stock-market boom that’s made the nation’s shares the most expensive in Asia.

Stamp duty on share trades has been increased to 0.3 percent, effective today, “to promote the healthy development of the securities market,” the finance ministry said on its Web site. The central bank this month raised interest rates for the second time this year, encouraging people to save rather than invest in stocks, and brokerages were ordered to make investors sign a declaration acknowledging risks when opening accounts.

The Shanghai Composite was down more than 5% in pre-market trading - we’ll see how much of that move holds by the end of the trading day (or night, as it might be in the U.S.).

Update: As of 9:30 pm CT, Shanghai Composite is down 2.9%.
Update II: As of 10:35 pm CT, Shanghai Composite is down 6.1%.

	Stocks continue to chop around. The Nasdaq remains in a month-long trading range, dancing above and below its 20-day moving average.
	But the bond market is showing signs of change, and not necessarily for the better, as rates on the short end are diving…
	…and rates on the long end are rising. Is the bond market telling us that this period of economic expansion is coming to a close?

Charts courtesy of StockCharts.com

Floppin’ and choppin’. Stocks struggled to find much direction today, giving back early gains, then fighting to keep from losing ground, all on volume just a bit better than last Friday’s. I guess a lot of folks made it a four or five-day weekend.

The indices all finished with slight gains, the Dow and S&P lagged, and the Transports got a little kick as oil and gasoline prices pulled back:

Things in the bond market weren’t quite as dull, however, as yields moved to new relative highs on the long end. In addition, 3-month yields dove back down to 4.81%:
6-month: 4.96%    2-yr: 4.89%    5-yr: 4.83%    10-yr: 4.88%   30-yr: 5.01%.

Market internals were positive, but still on very light volume. Advances/declines were 5 to 3 on the NYSE and 3 to 2 on the Nasdaq, with up/down volume 5 to 4 on the NYSE and 13 to 7 on the Nasdaq. New highs/lows were 160/28 on the NYSE and 140/47 on the Nasdaq.

More groups finished higher than lower, but there weren’t too many big movers. As we mentioned earlier, the big winners were merger/buyout driven, those being the REITs (+3.5%) and the networkers (+3.1% as Avaya moves up 15% - or two bucks. Who cares?). The airlines (+1.6%), disk drives (+1.3%) and transportation stocks (+1.1%) were also higher. Oil stocks (-0.8%) led the losers.

Energy prices pulled back for a change. Crude oil dove more than two bucks to $63.15/barrel, gasoline fell a dime to $2.30/gallon, and natural gas dropped a nickel to $7.59/mmBTU. The dollar index took a big morning dive, then bounced all the way back to even at 82.33. Gold only gained a couple of bucks to $657/ounce but silver gained nearly a quarter to $13.14/ounce.

BMB Note: Even though things finished higher, it was kind of an ugly day, and very unconvincing. I’m having a hard time being impressed with the last couple of days’ action, seeing as how volume has been very, very light. That tends to let stocks get pushed around a little too much.

The market is still acting rather tired, and feels like it wants to pull back from these extended levels. If it’s going to, I just wish it would get on with it. I’d rather see things move - either up or down - than sit through too many more days like today. Of course, it IS the end of the month, so I’m sure there’s a bit of an effort to hold things up - or at least not sell them off - to make the month look pretty.

On the news front, tomorrow we get the Fed minutes from the last meeting, and then Thursday and Friday will be full of numbers. Keep your eyes and ears open, and see what the market decides to do - if anything.

It appears that the market weakness of last week was not forgotten over the holiday weekend. The morning’s ‘rally’ has been all but given back, and the market seems to be trying to stave off a fall. Most of the groups have started to turn red - the ones that are holding up are doing so on either merger talk or oil prices: REITs, Networking and Airlines.

The indices are split. A/D lines are still positive but sliding.

The indices are pulling back from their early bump, and are now holding on to slight gains, but A/D lines remain well in the green. Most groups are higher, led by the M&A boosted REITs, networking and airlines. Energy stocks are showing slight losses.

Bonds are mixed. Energy prices are lower, the dollar has taken a bit of a dive, and gold and silver are higher.

• More M&A news, of course. The M&A noise gets pretty loud at the top.
• May consumer confidence better than expected. BMB is of the opinion that consumer confidence tends to follow the stock market to a degree.
• U.S. home prices fell for the first time since 1991.