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.

Yesterday’s factory orders, and particularly the business core capital expenditures, were hailed as an indication of the strength of the economy.

But now and then it pays to step back and take a look at the bigger picture. And if the trend is any indication, I’m not sure the picture is all that rosy.

Semiconductor stocks have made a nice move lately. But expectations of reduced chip inventories remain, well, just unrealized expectations:

A popular theory on the semiconductor stocks lately is that the industry in the first quarter made progress in reducing naggingly high inventory levels. But apparently, the results proved disappointing.

Lehman’s Tim Luke this morning notes that inventory levels remain “stubbornly elevated,” with the average company seeing inventory increase to 83 days from 74 days one quarter earlier. He notes that “the pace of the industry upturn has been somewhat tepid to date following an uncertain March as macro economic inputs remained variable.”

The current 83 days of inventory is above the 10-year average for the quarter of 62 days, and higher than the three-year average of 73 days. “We had expected a decline in Q1, but demand trends appeared to weaken in March, after some pick up in January and February, with some inventory build in handsets and at EMS companies, and continued slow demand in infrastructure,” he wrote, adding that “days of inventory increased or remained flat at almost all of the companies within our universe.”

Amongst the broad-based indices, the Russell is the only one still scuffling with its February highs.

While many other areas have enjoyed success in this market, a number of the gaming stocks have not. I don’t understand that - considering the stock market’s current condition, people sure seem to be in a gambling mood to me.

Charts courtesy of StockCharts.com

Grinding, unenthusiastic, light volume, range-bound trading made for a pretty dull day today - but of course, the indices finished higher. Did I even need to say that? Isn’t the market going higher every day from now until the end of time?

The S&P reaches the 1500 mark (told ya), the Dow makes it 22 of 25, the Russell adds less than a point, and the Utilities dribble lower:

Bonds were lower, and yields moved higher:
6-month: 5.02%    2-yr: 4.70%    5-yr: 4.59%    10-yr: 4.67%   30-yr: 4.84%.

Market internals were positive, and volume was about even with yesterday’s levels. Advances/declines were about 11 to 8 on the NYSE and just better than flat on the Nasdaq, with up/down volume 7 to 4 on the NYSE and 3 to 2 on the Nasdaq. New highs/lows were 248/14 on the NYSE and 164/47 on the Nasdaq.

Mostly green in the groups again, with disk drives (+1.3%), telecom (+1.3%), steel stocks (+1.2%), internets (+1.2%), gold and silver stocks (+1.1%), chemicals (+1.1%) and natural resources (+1.0%) leading the pack. Hospitals (-0.7%) led a short list of losers.

Energy prices were mixed, as crude dropped 30 cents to $63.19/barrel, but gasoline gained a few cents to $2.25/gallon and natural gas flew up to $7.94/mmBTU. The dollar bounce continues with the dollar index moving up to 81.96. The precious metals moved higher anyway, with gold up to $681/ounce and silver back up to $13.34/ounce.

BMB Note: Maybe the market really isn’t ever going down again - but somehow, I rather doubt that.

Something will come along, possibly sooner rather than later, that will disrupt this non-stop upward pattern. I don’t know what that is or when it will happen, but it will happen. For now, just be aware that the risk of some sort of a correction goes up with each passing day.

Maybe the stimulus will come out of tomorrow’s monthly jobs report, maybe out of next week’s Fed meeting, maybe out of Asia, or maybe out of left field. But something will disrupt the flow, and we need to be ready to react to it when it happens, in whatever manner we see fit.

Until then, stick with whatever is working for you. And if you have something that isn’t working in this market, you probably need to give some serious thought to unloading it.

Another positive start - what a surprise. The indices hung around the zero line for a bit, but have edged higher since then. The S&P has moved above the 1500 mark, and A/D lines have worked their way into the green as well. Transports, airlines, homebuilders, defense stocks and disk drives lead the way at the moment.

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

Mostly good news on the economic front this morning: initial jobless claims down, productivity up (I still have no idea what that means or how it’s measured), and ISM services index up.

I think those looking for a rate cut from the Fed next week are smokin’ something.

That would be, over at Calculated Risk.

First, there’s a lot of slime oozing out of the closets at Beazer Homes, and the Charlotte Observer is keeping a close eye on it:

But among the more outrageous recent examples of the dark side of the carrot culture is this. Beazer Homes USA paid some homebuyers for good marks on a customer satisfaction survey. An article by the Observer’s Binyamin Appelbaum on Sunday told of six Beazer customers who said they got letters in 2001 promising $100 if they’d rate the company highly.

Why bother? It’s just a customer satisfaction survey. Scott Thorson, who signed a letter the Observer saw and is now president of Beazer’s South Atlantic region, didn’t return a call for comment. But he was among executives who could earn a bonus based on good survey results. It isn’t clear whether Mr. Thorson got the bonus. Nor is it clear whether he was the only executive sending the letters.

Then there’s this note on more downgrades of subprime paper:

Over the past two weeks, Moody’s Investors Service cut credit ratings on more than 30 bonds that were issued in 2006 and backed by pools of “subprime” mortgages, home loans made to consumers with troubled or sketchy credit histories. …

More than half the bonds that were downgraded were originally rated “investment grade” but were cut to “junk” status …

“It’s unusual to see downgrades in subprime deals so soon after they were issued,” said Jay Guo, a director of asset-backed securities research at Credit Suisse Group. “This is not a normal phenomenon and is a cause of concern.”

Apparently Mr. Guo did NOT receive his copy of the memo that clearly states: “The market is in melt-up mode, and is moving to new record highs nearly every day. Please keep any ’causes of concern’ to yourself.”

From the comments on the aforementioned post at The Big Picture:

This just in:

Tongue-in-Cheek Press, New York

“In one of the most violent corrections in recent memory, the market spent almost an hour yesterday in the red, prompting an impassioned cry from investors to the Fed to ‘lower rates.’

In a surprise move, the Bank of Japan, in an emergency meeting, lowered their target rate to negative 1.5%. BoJ president Honda Toyota said, ‘We couldn’t afford a world-wide financial panic. Besides, this shit we print isn’t worth anything and it doesn’t cost us anything to print it, and paying investors to take it off our hands is cheaper than paying for trash service.’

The Dow closed at 84,970, 2 points off the high of the day on late profit taking.

At The Big Picture this morning, Barry shares an intro to yesterday’s market commentary that was sent to his subscribers:

In a seeming paradox, we have a rapidly accelerating market, and a rapidly decelerating economy. Hopes for a rate cut in the face of this asset inflation are pushed out further and further into the future. This is now a trading market, where momentum and trend dominate, increasingly detached from the decaying domestic fundamentals. Global growth remains strong, and despite that – or perhaps because of it – US markets are lagging their overseas peers.

How much further this market can rally is anyone’s guess, but a “Melt-Up” to Dow 14,000 would not surprise us. While overdue for a pullback, the markets have shown little interest in any such activity. Instead, traders seem to want to rally ‘em on any news, good or bad.

A melt up would likely be accompanied by rush back into equities by the one group notably absent from the current action: the public. As the trading volumes at the major online brokers have revealed, John Q. Public is nowhere to be found in the current market. We suspect that the aforementioned rush back in would be accompanied by a significant spike in Bullish sentiment. Until that excessive Bullish sentiment develops, it is not safe to trade on the short side of the market.

Meanwhile, a “melt up” presents a high risk trading, not investing, opportunity. A melt up inflates the air pocket that has already developed underneath the present environment; only the most nimble traders are capable of avoiding the ensuing danger.

Hmm. In listening to and reading the media coverage, I wouldn’t know that bullish sentiment could possibly get more excessive.

And Barry also passes along this quote from today’s WSJ:

“For the next week or two, I would advise investors who have money that they’re thinking of putting in the market to hold off,” said strategist Al Goldman, of A.G. Edwards & Sons. Mr. Goldman said there seems to be a “buying panic” this week among money managers who have come to regret keeping clients’ money on the sidelines during last month’s gains. “At the end of the day, these guys are paid to manage stock, not to manage cash,” he said.”

It’s up to you to decide how to proceed in this seemingly high-risk environment. Do you try and find a spot to jump on what looks like a pretty fast moving train, not knowing just where the end of the line is, or do you try to be patient and wait until the train slows down or stops - so that maybe you can get a chance to ask the conductor where it’s going?