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.

Oh wait, this probably isn’t good news - it’s new record highs at the gas pump:

Gasoline prices have surged to a record nationwide average of $3.07 per gallon, nearly 20 cents higher than two weeks earlier, oil industry analyst Trilby Lundberg said Sunday. The previous record was $3.03 per gallon on Aug. 11, 2006.

But, not to worry. They’re already calling a top:

But despite inventory fears that have sent prices higher, there are signs that the rising prices at the pump may be peaking.

Why do we even bother to have the market open anymore? Why don’t we just ask the “strategists” whether stocks go up or down during the week and by how much, and then have everyone just square up their accounts at the end of the week?

U.S. stocks will push higher next week, driven by healthy corporate earnings, bubbling mergers and acquisitions activity, and expectations that the Federal Reserve will leave interest rates unchanged at its policy setting meeting on Wednesday, strategists said.

I guess the “strategists” already know how the week is going to go - can we assume, then, that they’re long the market?

Well, it doesn’t always work out the way the “strategists” see it happening. As in football, the predetermined ‘favorite’ doesn’t always win - “that’s why they play the game.”

The latest issue of the ChartWatchers newsletter from StockCharts.com is available for your perusal. Topics this week include gold stocks vs. the dollar, our bullish but overbought market, the lagging small-caps and the recent surge in the semis.

“Fit to Burst” is the column by Andy Xie that was mentioned by Reuters the other day. In it, Xie discusses the current state of the financials in China, and says that with appropriate action, the unwinding of the bubbly atmosphere could be dampened. But time’s a wastin’:

While opening alternatives to excess liquidity is a solution, it takes time to work. The government should take action now to contain the bubble as a stop-gap measure. First and foremost, the government must crack down on market manipulators who take advantage of the bullish sentiment and suck public money into worthless stocks. When the bubble bursts, these stocks can easily drop by 90 per cent. As with the property tightening, the stock market tightening should start with fraud investigations.

***

Listed companies that invest their working capital should also be investigated. The government has already ruled against this practice, but the compliance is still uncertain. If a company is private and invests its own money, the government does not have to intervene. However, if companies borrow from banks in the name of funding real business activities but speculate in the stock market instead, it endangers banks.

***

The time for action is now. The market is in a frenzy and the bubble can mushroom quickly. The longer the government waits, the bigger the disturbance to social stability when the inevitable burst comes.

The latest run in the Dow has Bill Fleckenstein looking back at the final days of the Nikkei’s rise in 1989:

Recently, I decided to revisit a chart of Japan’s Nikkei index from 1989. What prompted me were comments by GMO Chairman Jeremy Grantham that, for America’s current stock bubble to burst, it may need to go parabolic, a la Tokyo 1989.

When I read that, I thought: Wait, the Nikkei did not go parabolic at the end in 1989. I was short that market in 1989 and held long-dated put warrants, so I followed it quite closely. In the final five months before its crash, the Nikkei was almost orderly, rallying about 20%. By contrast, the Nasdaq Composite Index ($COMPX) nearly doubled in the last five months before the 2000 crash.

In any case, after a little checking, I did find an amazing similarity between the last month or so of the rise in Japan that ended on Dec. 29, 1989, and the current advance in the Dow Jones Industrial Average ($INDU) (through April 27): Specifically, the last 32 out of 38 trading days in Tokyo were on the upside, with an initial run with a higher close on 19 out of 21 days, followed by seven out of 11, followed by six for six before about a 40% drop in the course of nine months took place. Recently, from the lows of March 5, the Dow closed higher in four out of six sessions, followed by seven out of 11, followed by 20 out of 22 — for a grand total of 31 out of 39 days.

Now, I am not a big believer in analogs, but if the mind-set in Tokyo back in those days was similar to the mind-set that we’re witnessing here today, which, by my reckoning, it is, I guess it’s not impossible for that similarity to have some predictive power.

I’m not putting up any money on the back of this idea just yet. But I thought it was so interesting, I wanted to have it on my radar screen, and I assumed others would, as well.

We’ll see, won’t we? Regular readers know that Fleck has been waiting for the “next time down” to start for quite a while now. And it’ll start - someday. The problem is, none of us will ever know when, until it’s well underway.

Also interesting that Fleck would bring up 1989 - isn’t that the year that Scott Bleier was comparing the current environment to as well?

Notes on the latest moves in the industry groups:

• As we’ve noted recently, the strong market makes the pockets of weakness that much more obvious: disk drives, REITs, airlines and gold and silver stocks for instance.
• Some of the health care areas have either flattened out or pulled back: like biotech, drugs, HMOs, hospitals.
• Banks and computer hardware haven’t been joining in the market party with great enthusiasm.
• The metals have taken a slight breather from their strong move upward.
• Recent weakness in retail is most definitely of concern when it comes to the economy as a whole. If the consumer does indeed slow down, things will change.
• For a more detailed breakdown of group movement over various time periods, try Prophet.net’s Industry Rankings page.