Bear Mountain Bull

Don’t they say bad news comes in threes?

From CNN Money:

A Bear Stearns’ hedge fund with about $900 million in mortgage investments is reportedly facing huge losses and is refusing to return investors’ money, according to a news report published online Tuesday.

Revelations of the imperiled hedge fund comes weeks after the investment bank closed two hedge funds that suffered losses arising from the subprime-mortgage market.

More at MarketWatch.

Update: Similar news from Macquarie Bank in Australia, as they join a couple of Australian hedge funds in the subprime sludge.

I’m disappointed I missed this report from Gary Kaltbaum yesterday, cuz it’s a doozie (how in the world do you spell ‘doozie’, anyway?).

You’ll have to go over to go over to TradingMarkets to read the story of Cosmo Kramer and his “Rooms To Go” mortgage, the private equity “maggots” (here I thought they were ‘pirates’), and the Democrats that want to tax you into kingdom come.

But then of course - last, but certainly not least, is Gary’s take on the market. This is as of yesterday morning - but given the action of the past couple of days, I can’t imagine that his stance has changed:

The amazing thing about the week’s action was the reaction. Most thought the poor action just started on Thursday. The poor action has been going on for weeks despite the DOW hitting 14,000. I had outlined this to you in previous reports. As I told you, the market was getting thinner and thinner…new lows were expanding markedly while new highs were contractiong…small caps and mid caps were breaking down…and the average stock was getting klonked. On top of that, FINANCIALS were acting like they were going out of business. This past week was simple. The popular indices just played catch-up to what was already going on underneath the surface.

I do have a few predictions. First, I think you are going to see all the minions out in force…telling you everything is ok. Paulson was out again Thursday and Friday saying subprime is not a problem. This man is turning into a classic case of the “boy who cried wolf.” If he keeps this up, there will come a point where the market turns a deaf ear. Secondly, with any more ugly, I expect Gentle Ben to throw in a rate cut as Gentle Ben does not want the market to go down. Third, expect the New York Times to blame everything on George Bush. Of course, according to the New York Times, George Bush caused the bubonic plague.

Now what? I would be about as defensive as defensive could be. Markets are short term oversold and extended to the downside but if we are indeed in some trouble here, oversold can get more oversold. All I know is that too many stocks and sectors have topped…and I don’t think they have a chance to just turn around in the near-term. All short-term support levels have been broken and in the RUSSELL 2000’s case, it is now below the longer term 200 day average…and that is not good. In a previous report, I alerted you to own the TWM…the double inverse of the RUSSELL as I thought it was the weakest of the major indices.

We are already hearing the same stuff we always here when the market drops for even a day. We are hearing: “Cheap”…”Overdone”…”Hiccup”…”Economy is fine”…”Fundamentals do not support a drop”…”Buy any drop”…”Market is a gift”…”Great value” I just find it amazing that not one of these permabulls ever even considers a correction possible…let alone something worse. I dont know if we crash…but it could happen. I don’t know if we slow bleed…but that could happen. I will just keep a defensive posture until the market decides otherwise. How will I know? I will be looking for a follow through day to change the trend back to a confirmed rally.

	The Nasdaq 100 joined the other major indices in falling below its 50-day moving average, the first time it has done so since April.
	Speaking of the 50-day - we mentioned yesterday that there were only a few groups holding above that level. After today, there are a few less. The semiconductors broke the mark today…
	…and the Computer Tech group cracked it as well.
	The Networkers are left resting right at the 50-day.
	NVTL has been forcibly removed from the ‘leading stocks’ club.
	And yes, stocks can indeed go to zero. It sure looks like AHM is headed in that direction. The question I have is: Who’s buying it here?? Survival “chances are low.”

Charts courtesy of StockCharts.com

A couple of food chains going in opposite directions:
BWLD - closed at 43.22, trading at 35.90.
CMG - closed at 88.34, trading at 94.51.

A food retailer - WFMI, closed at 37.04, trading at 40.08.
On the solar front - FSLR, closed at 112.57, trading at 99.61

If you’ve been one of those that just isn’t convinced that the market is on rather shaky ground, perhaps today’s action will do a little more convincing. The futures came into the day up big, and it looked like there was going to be an effort to jam prices higher, and it worked - for about an hour. The Dow went to a high of +140 points, but gave it all back as the day wore on, then melted down into the close, as the indices went out - again - right near the lows of the day. All in all, the Dow reversed to the tune of some 286 points off its high of the day, gave up all of yesterday’s gains, and undercut yesterday’s lows.

Some ugly stuff. The Nasdaq 100, not listed here, coughed up nearly 42 points, dropping 2.1%.

Bonds moved slightly higher, bringing yields down a few more bps:
6-month: 4.97%    2-yr: 4.52%    5-yr: 4.57%    10-yr: 4.74%   30-yr: 4.90%.

Market internals started out strong, but turned quite negative, and volume increased above yesterday’s levels. Advances/declines were about 2 to 3 on both exchanges, with up/down volume near 1 to 4 on the NYSE and near 1 to 3 on the Nasdaq. The high/low picture remains pretty grim, with new highs/lows at 44/362 on the NYSE and 91/294 on the Nasdaq.

The groups were a pretty deep shade of red again. Leading the way down were the networking stocks (-3.2%), followed by the brokers (-2.7%), homebuilders (-2.4%), disk drives (-2.4%), airlines (-2.4%), semiconductors (-2.3%), banks (-2.2%), internets (-2.1%), retailers (-2.0%) and steel stocks (-2.0%).

Energy prices were mixed. Crude oil busted to a new closing high of $78.21/barrel, and gasoline rose to $2.14/gallon, but natural gas slipped back to $6.19/mmBTU. The dollar index gave up only a bit of ground to 80.79. Gold and silver stood pat, at $665/ounce and $12.86/ounce.

BMB Note: So yesterday’s bounce is already history, and that leaves us back where we were after Friday’s session, if not even a little worse off. This is not good.

This market is in very rough shape, and you need to understand that. How you decide to handle it is up to you. For me, capital preservation is taking precedence over trying to make money at the present time, especially given the short-term oversold conditions and choppy action.

As always, we don’t know how bad it gets. But I do know that if things don’t change drastically, and soon, I will be looking much harder for opportunities on the short side than on the long side if the market ever does manage to put together some sort of a bounce.

The stock of American Home Mortgage is not trading for the second consecutive day.

Update - 1:05 CT Looks like AHM has resumed trading, right around 2 bucks. That’s after having closed at 10.47 on Friday. This has got that Enron sort of feel to it…

Update - 1:15 CT Make that about a buck-forty - 1.40. Down a cool 86 percent from Friday’s close. And down from 36 bucks back in February.

An early attempt to push the market higher has faded considerably, with the indices and the A/D lines coming well back off their highs for now, and the Nasdaq 100 having slipped into the red. The groups are still split, with the winners being led by the paper stocks, utilities, metals, REITs and chemicals, and the networkers, disk drives and semiconductors leading the losers.

Treasuries were a bit lower after the open, but have moved back to near flat. Energy prices are mostly higher, with crude oil firmly above $77 at the moment. The dollar index is flat, as are gold and silver.

Deron Wagner has got it right when he talks about the question that everyone wants to know the answer to:

The question on the minds of many investors is whether or not yesterday’s bounce had any real significance. Has the broad market started to form a bottom already, or was it merely a bounce from “oversold” conditions that will just lead to new lows in the near future? All we can do to attempt to answer that question is look at the available facts.

The main bullish argument is that recent market corrections have righted themselves quite rapidly. In late February and early March of this year, the S&P 500 fell more than five percent over a two-week period. Historically, corrections of such intensity usually require several months before the major indices begin moving back to their highs. But stocks snapped back with a vengeance, sending most of the major indices to new highs just one month later. One could logically argue the S&P 500’s current six percent correction off its record high will follow the same path that it did in March.

Bears, on the other hand, are armed with several reasons why things may be different this time around. Aside from the all the talk of subprime lending troubles, a credit crunch, and all the other fallout that resulted, there are some less obvious technical concerns that the popular financial media has been failing to discuss.

And it doesn’t sound like Wagner buys into the idea that a ‘bottom’ will be put in in only a day or two:

Aside from the numerous breakdowns below the 200-day MAs, the tremendous overall volume spike that occurred in the markets on July 26 can not be ignored. Remember we pointed out that volume in the NYSE that day surged to its second highest level ever! It simply cannot be denied that stocks were under intense institutional distribution at the time. As such, why would the “smart money” aggressively jump back in the markets so soon? Presently, the market lacks any significant stimulus, whether technical, economic, or geopolitical, for large funds to resume their prior levels of buying.

While we can use available technical data to create logical scenarios that stocks might follow, don’t forget that the stock market doesn’t care what we think! Just as water running down a hill will always flow around rocks and other obstacles, the stock market also follows the path of least resistance. As such, it always does what it wants to do. All we can do is be prepared for any possible outcome.

With all the major indices now in intermediate-term downtrends, our plan is pretty simple. Now that a bounce has begun, we will look to initiate new short positions upon confirmation that the bears have resumed control.

The indices have clearly put in a new lower low after hitting new highs a couple of weeks ago. Now we’re looking to see if they put in a lower high to confirm that a downtrend has begun.

After the carnage of last week, only a few groups are still holding above their 50-day moving average (red line):

Charts courtesy of StockCharts.com

It took about half the day, and a little undercutting of Friday’s lows, for the market to decide that it was time to stop going down, at least for a while. But as ‘bounces’ go, so far, this one has been pretty feeble - none of the indices were able to recover Friday’s gains, and only the Transports mounted a challenge to Friday’s highs:

Treasury prices slipped, and yields moved marginally higher:
6-month: 4.97%    2-yr: 4.59%    5-yr: 4.64%    10-yr: 4.81%   30-yr: 4.96%.

Market internals improved, but volume couldn’t match last week’s record levels. Advances/declines were 3 to 2 on the NYSE and 5 to 4 on the Nasdaq, with up/down volume near 3 to 1 on the NYSE and 13 to 7 on the Nasdaq. The high/low picture hasn’t improved much, as new highs/lows were 24/430 on the NYSE and 68/312 on the Nasdaq.

The group picture got quite a bit greener, with the winners being led by gold and silver stocks (+3.4%), metals and mining (+2.7%), steel (+2.1%), chemicals (+2.0%), commodities (+2.0%), banks (+1.9%), semiconductors (+1.7%), oil stocks (+1.7%) and disk drives (+1.5%).

Energy prices were mixed. Crude oil couldn’t hold the $77 level, finishing back at $76.83/barrel. Gasoline dropped a couple of cents to $2.09/gallon, but a new front month contract in natural gas pushed prices up to $6.49/mmBTU. The dollar index pulled back slightly, to 80.85. Gold snuck back up to $665/ounce and silver moved up to $12.86/ounce.

BMB Note: Not a lot to write home about today. We were expecting the market to bounce sooner or later, and maybe this is the start of it. If so, it’s a rather puny start.

The bottom line is that most groups and most stocks remain in very poor technical condition. It seems to me that it’s time to sit back and make the market prove itself before diving in. Maybe it’ll be able to patch itself back together and make another move higher as it did back in March, but it’s going to take some convincing to get me to believe that. And if it doesn’t, we’ll still need to see a little bit more of a bounce before good entries will be presented on the short side.

There will be more earnings numbers this week, and some of the more minor economic reports leading into the monthly jobs number on Friday. Not sure just how interesting this week is going to be at this point. Today wasn’t exactly inspiring.

A lot of floppin’ and choppin’ around so far this morning, without a lot really happening. The indices are bounding around between green and red, and A/D lines are mixed as well. A few groups are getting a bit of a bounce: metals, gold and silver, steels. No major damage done on the downside yet.

Bonds are also fairly flat. Energy prices are near flat, the dollar index is slightly lower, gold and silver a little higher.

Apparently, “Helicopter Ben” Bernanke has sent his squadron of money-dropping choppers, along with a few foot soldiers, to Japan in an effort to help stimulate their stagnant economy.

You will get no help.

It just doesn’t take anything to bring the pumpers scurrying out of the woodwork these days. Here we have an article with all the required phrases - “cheap”, “buying opportunity” and the like. What’s amazing about it is that a 3 to 4 day selloff can be characterized as a “slump”, and supposedly leaves stocks the “cheapest in 16 years”.

Investors are preparing to snap up shares of telephone, health-care and computer companies after last week’s $2.1 trillion global stock market rout left U.S. equities the cheapest in 16 years.

***

Anderson said he added to holdings in telephone, health- care, technology and industrial shares during the slump.

This is truly incredible stuff. Using these metrics, the next time your favorite baseball player goes 0-for-4 on the night, you have every right to declare him to be in a “slump”. I guess if he then has another rough night and extends that to 0-for-8, you’ll have to say he’s in a “bear market”. Of course, everyone else will be telling you that he’s reached “the bottom”…

Most of the homebuilding stocks have been in the tank for at least a year-and-a-half, some going on two years already. But amazingly enough, there are still a few components of the PHLX Housing Index that are just now looking like they might finally be topping out. Just a few ideas to keep in mind if you’re one who will be on the lookout for possible shorting opportunities on the next market bounce…

Charts courtesy of StockCharts.com

As we know, Bill Fleckenstein has been waiting for the market to get into trouble for some time now. And, as most everyone else has been noting, he describes the problem as being rooted in the credit markets:

For a change, this week I’m going to delve into stock-market machinations (both on the surface and behind the scenes) because I think they suggest we have reached a critical stage in the credit-unwinding process. My focus will be on Thursday’s action.

Before the open, stock-index futures were down about 1%-plus. Why was that important? Because in the last year or so, when we have seen an ugly session (like the one Tuesday), it’s typically prompted an immediate rally — if not the following day, then the day after that.

However, Wednesday’s rally was pretty punk. Which is why I (and the bulls) thought there’d be another attempt the next day. The fact that the futures fell out of bed pre-opening was thus an indication that something was potentially very different.

As I checked all of my contacts in credit land, it quickly became clear to me that this was the source of the problem. One friend who watches the high-yield market said: “Credit is an unmitigated disaster this morning. Bonds down 2% to 3% across the board.” In addition, the “Lord of the Dark Matter” confirmed that structured credit was really getting thumped, ditto all the leveraged indexes and the ABX credit stack. To quote him: “Mate, there is a massive margin call in structured credit and there are no marginal buyers for it.”

Each day in the market wrap, BMB talks about the ‘bond’ market - what he’s really talking about there are specifically US Treasuries only. For while Treasuries have rallied in the supposed ‘flight to quality’, and that has brought yields on Treasuries lower, the story in high-yield corporate bonds and mortgage debt has been quite different. In those higher-risk areas, prices have been plummeting in a ‘flight from risk’.

Notes on the latest moves in the industry groups:

• Of those “strongest groups” we’d been watching - commodities, defense, chemicals, internet, networking, oil services, computer tech, and oil stocks - the oil services and computer tech were the only ones to hold the 50-day moving average after a very rough market week.
• Of those groups that had been making moves of late, those being the disk drives, computer hardware, semiconductors, transports, gold and silver stocks, only the disk drives were able to hang onto a significant portion of their recent gains.
• A number of groups suffered signifcant breakdowns out of their recent ranges, like paper, steel, drugs/health care, insurance, retail, hospitals, utilities, airlines and telecom.
• The worst got even worse: the brokers, the banks, housing and REITs.
• For a more detailed breakdown of group movement over various time periods, try Prophet.net’s Industry Rankings page.

During a bull market, everyone sounds like an expert. But when the market changes character, the amazing thing is that those same people, that sounded like experts when stocks were going up, will still be saying the same thing: “Buy stocks!” Their tune never changes.

When we do go into another bear market — and we will, someday — you’ll find that listening to those people can get quite expensive. For those that kept telling you to buy stocks, all the way up, will also be telling you to buy stocks all the way down - they will never tell you to sell.

Woody Dorsey alluded to the problem in his column yesterday: “Financial Culture will tell you anything but the truth.”

Gary Kaltbaum has been warning his radio listeners for months that, when that time comes, they can count on receiving absolutely no help from the Wall Street punditry when it comes to making wise investment decisions. These days, it seems like all it takes are just a few down days strung together for the propaganda machine to kick into high gear.

Here is Gary on his radio show, Investor’s Edge, yesterday afternoon - click on the arrow to start the audio clip (2:12):

Update: More proof that the message will never change from Michael Panzner. You’ll get no help from these people. Maybe they’re right - maybe everything will be just fine. But what if they’re wrong? How far down would things have to drop before they would admit it? Those are the questions you have to ask yourself…

So much for that. Even the strongest sectors got hammered this week, sending them all back below their 50-day moving averages:

As for the rest of the bunch, they are left in various stages of ugly - and ranging to the very ugly:

The numbers as red starts to engulf the board:

Charts courtesy of StockCharts.com

We’ve been hearing for months that the bull move just couldn’t be over - after all, Joe Public hadn’t been diving in with both feet.

But if mutual fund outflows are any indication, Joe might not be willing to go into overtime in this game. Maybe Mr. Public got burned badly enough the last time around that he’s not planning to be the last one at the party this time:

Mirroring the sell-off in U.S. stocks, this week saw the biggest outflow from U.S. stock mutual funds in five years, according to TrimTabs.

For the week ending Thursday, fund investors cashed out a net of $11.3 billion. The biggest outflow came Tuesday, when investors cashed out a net $5.5 billion, making it the second-highest daily outflow of the year. The highest occurred on Feb. 27, when investors sold a net $6.5 billion worth of U.S.-focused funds following a plunge in the Chinese stock market.

Sounds like Joe Public has been dancin’ pretty close to the door all along.

“No need to worry. Everything is fine.”

Chart courtesy of StockCharts.com

They say that “they don’t ring a bell at the top.” After this week, I’m not so sure about that. It seems to me that the bells are ringing so darned loud right now that investors should be near going deaf.

The market spent most of the day in the red, but things got a lot more ugly in the last half-hour, and took the indices out at the lows of the day, and even below the lows of yesterday.

This is not a market to be messed with at this point:

Bonds moved higher once again, and yields continue to slide:
6-month: 4.93%    2-yr: 4.51%    5-yr: 4.56%    10-yr: 4.76%   30-yr: 4.93%.

Market internals were, as you might expect, pretty negative - and I don’t have a good idea where volume came in (my quotes have been messed up all day), but I believe it was pretty strong. Advances/declines were 1 to 2 on the NYSE and about 3 to 7 on the Nasdaq, with up/down volume 1 to 3 on the NYSE and 1 to 4 on the Nasdaq. New highs/lows were 20/383 on the NYSE and 65/294 on the Nasdaq.

Another red day in the groups, with the REITs falling 2.9%, followed by paper stocks (-2.6%), oil stocks (-2.5%), chemicals (-2.3%), oil services (-2.3%), disk drives (-2.3%), computer hardware (-2.2%), insurance (-2.2%), drugs (-2.2%) health care products (-2.1%) and semiconductors (-2.0%).

Energy prices moved higher, but the energy stocks didn’t seem to get much help from that fact. Crude oil snuck above the $77 mark and held it to finish at $77.01/barrel. Gasoline gained a few cents to $2.11/gallon, and natural gas crawled back above $6 to $6.11/mmBTU. The dollar finally gathered a bit more strength, pushing the dollar index up to 80.97. Gold slipped a bit to $660/ounce and silver slid to $12.60/ounce.

BMB Note: Ugly stuff, and just proof that oversold can become even more oversold. Maybe things will firm up quickly and turn around, but there’s an awful lot of Humpty Dumpty Market strewn all over the place. The market would need to spend a lot of time just gathering up pieces of itself first - before even beginning to think about putting itself back together.

Job number one at times like these is preservation of capital. As we’ve noted, we don’t have any idea how far this goes or how long it lasts — and there will no doubt be bounces that look good, possibly soon — but we do know that the character of the market has changed for the worse, and the mindset of the investor must change along with it.

As has been noted by folks like Gary Kaltbaum on his radio show, you’re going to hear an endless stream of people in the media trying to tell you that everything is going to be fine (CNBC had four members of the Bush administration on live television this morning, trying to do just that). Maybe it will be - those people got lucky and have been correct for a few months following the big February selloff. But remember that those same people said the very same things back in the spring of 2000, and looked what happened then. And they were telling you all the way down that things were fine, that stocks were cheap, that every dip was a ‘great buying opportunity, that this was ‘the bottom’. Over and over again.

You can listen to them if you like. But my preference is to listen to the market. And right now, the market is virtually screaming, loud and clear, that everything is NOT fine.

An interesting essay from Woody Dorsey over at Minyanville today. Here’s a sample and the wrap-up, but do go read the whole thing:

A single cupcake at lunch may be a meaningless treat, but a steady diet of cupcakes over, say, five months will have an accumulated effect. Stock markets also ignore effects for only so long before they become infected.

***

Why has the market turned? Is it just the seasonals? Well, it is just “everything”… everything that already exists. It is simply the recognition of reality. It is the accumulated causation. It is the paraptakarma. The bullishness became boring. The acme of market ignorance has passed. The silly season has turned into the selling season. The paradigm has shifted from “Excellent Earnings” to “Credit Crunch.” Don’t look for a low. As a fond observer of bottoms of all shapes and sizes, I will be watching along with you, patiently. For now, be a happy bear on the beach just watching the bottoms go by. Financial Culture will tell you anything but the truth. Don’t dig the dialog of denial.

A lot of muddling around to start the day. The indices are showing slight losses, and A/D lines are slightly in the red as well. Right now, it’s a bit hard for me to tell exactly what’s going on, since many of the quotes I’m getting are still based off Wednesday’s close for some reason - and you can imagine what that’s doing to the ‘change’ column.

Bonds look to be flat to slightly higher. Energy prices are higher, the dollar is mixed to a little higher, gold and silver are lower.

Maybe it’s just me, but in the aftermath of yesterday’s huge selloff, Larry McMillan sounds like he’s having a bit of trouble getting his arms around the indicators:

To summarize the technical indicators then: the $SPX chart is bearish, having broken out on the downside; breadth is deeply oversold, but not yet on a buy signal; $VIX is potentially about to give a spike peak buy signal; and the equity-only put-call ratios are bearish. This adds up to an intermediate term bearish signal. However, because of the extreme oversold conditions in both $VIX and breadth, sharp but short-lived rallies are possible.

One plausible scenario is that the market rallies enough to satisfy the short term signals and work off the oversold conditions, and then declines to retest today’s lows near $SPX 1465. If that holds and if the put-call ratios can roll over to buy signals, that might be the end of the decline. If not, a true correction — which historically has been defined as a decline of 10% — might well emerge, taking $SPX down to 1400 or slightly lower.

“PepsiCo Inc. will spell out that its Aquafina bottled water is made with tap water”

This bottled water craze has always amazed me. People will bitch about paying $3.50 for a gallon of gas, but they’ll happily shell out much more than that for their precious bottled water without saying a word.