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 used to think that Pimco’s Bill Gross had valuable things to say, but ever since this housing mess started to come apart, all he’s done is ask for interest rates to be driven into the ground, and for the government to step in and bail out everyone and their mother.

Like this, from The Big Picture:

Bill Gross on the current credit situation:

“In my opinion, the private credit markets have forfeited their privileged right to operate relatively autonomously because of incompetence, excessive greed, and in minor instances, fraudulent activities.

As a result, the deflating private market’s balance sheet is being re-nationalized in some cases with increased regulation, in others with outright guarantees and agency lending. Ultimately government programs which support private credit market assets may be required in order to prevent an asset deflation of significant proportions. Authorities must act quickly, with a shot of adrenalin straight to the heart of the problem: home prices.”

-Bill Gross, Pimco
>

Gross goes on to note that “homes are the most highly levered and monetarily significant asset that American consumers own, if they decline much further they will drag the rest of the economy with them,” and therefore any further decline needs to be stopped quickly in order to avert additional crises.

This explains all of the Fed’s recent machinations . . .

Here’s my comment on the subject, posted at Barry’s site:

If the consumers actually did “own” their homes and weren’t so “highly levered”, we wouldn’t be in this mess. It was the excess leverage that propped up housing prices too far in the first place (zero money down - can you even call it ‘leverage’ when the ‘owner’ has zero stake in the asset?).

The gang is right - keeping prices up, at any cost, is hardly the solution. The homeowner must be ‘delevered’ along with everyone else in this cycle of debt destruction.

Maybe this latest move up in the health care products and the hospitals can help turn the lagging health care sector around. Some are saying it’s overdue. After all, it’s supposed to be a defensive sector, right?

Charts courtesy of StockCharts.com

A familiar story. Big up days, followed immediately by a mediocre or weak day.

Today wasn’t particularly weak - though the indices were lower, A/D lines remained positive. But the little bit of momentum that was seen early in the morning was given up, and the groups that were trying to ‘lead’ the charge up turned right back down.

The indices finished mixed, clustered around the flat line:

Treasuries were slightly lower, pushing yields up a bit higher, except out at the 30-year:
6-month: 1.55%    2-yr: 1.88%    5-yr: 2.71%    10-yr: 3.58%    30-yr: 4.39%.

Internals were mixed, on lighter volume than yesterday. Advances/declines were 3 to 2 on the NYSE and 10 to 9 on the Nasdaq, with up/down volume 3 to 2 on the NYSE but 9 to 10 on the Nasdaq. New highs/lows were almost even, at 44/11 on the NYSE but 32/61 on the Nasdaq.

The groups split, with a bump in commodity prices pushing those groups to the top of the green list: gold and silver stocks (+4.3%), oil services (+1.8%), paper stocks (+1.7%), metals and mining (+1.5%), steel stocks (+1.5%), oil stocks (+1.2%), natural gas stocks (+1.2%) and homebuilders (+1.0%). The losers were led by the airlines (-3.5%) and the HMOs (-1.5%).

I’m not sure if it was a delayed reaction to the weekly inventory report or what, but energy prices took off today after a rather quiet open. Crude oil rose nearly 4 bucks to $104.83/barrel, and gasoline spiked 12 cents to a new high of $2.77/gallon. Natural gas also rose, to $9.83/mmBTU. The dollar tried to rally in the morning, but was sold off during the day, and the dollar index fell to 72.26. Gold and silver bounced back after getting trounced yesterday, with gold getting back 24 bucks to $904/ounce and silver rising a big 70 cents $17.31/ounce.

BMB Note:   It doesn’t look like a great day for stocks, and it wasn’t, but it wasn’t a bad one either. The bulls, I’m sure, are disappointed that the morning gains didn’t stick, and of course that puts doubt in some minds that like the others, yesterday’s big move won’t last. Time will tell.

The advance/decline figures hung in there, so all is not yet lost on this latest ‘rally’, but the indices were turned back at resistance levels yet again, so until we see them able to punch through to the upside - with accompanying volume - these moves up to the top of the range continue to be suspect.

Many have been hailing the drop in commodity prices, but while metals and softs have struggled, energy prices really haven’t given up much ground. That $100 mark looks like a pretty strong floor for crude oil for the time being, and gasoline just rocketed to a new high level today. That’s really not great news, though it’ll help to hold up the energy stocks.

In the precious metals, gold and silver got a nice bounce back, and in the course of the past two days, silver has recovered all of its losses from yesterday morning’s big gap down, and then some. And while the metals themselves went to new lows yesterday, the gold and silver index ($XAU) did not, and those stocks got a nice bump back up today. We’ll continue to keep a close eye on the PMs, looking to add back to our positions there, having taken some profits during that big run up.

As far as stocks are concerned, still pretty much a question mark. We still need some follow-through to be convinced that there’s some upside worth playing, and I’d lot rather see a few solid 50 or 60 point up days with decent volume than those huge 300-400 point rallies that don’t appear to have firm sponsorship. Markets cannot live on short covering alone.

So we’ll continue watching, and continue waiting. Being patient and stepping back has enabled us to avoid a lot of the angst caused by the all of the ups and downs, especially since little progress is really being made in either direction.

Mike Shedlock, commenting on yesterday’s terrible auto sales numbers:

GM Blames Consumer Confidence

“I think the main weakness is consumer confidence,” said GM sales chief Mark LaNeve. “It’s (mortgages) resetting. It’s worry about the news. It’s presidential candidates telling you how bad it is. It’s Bear Stearns.”

“The compact cars and the new crossovers are really what is carrying most manufacturers,” said Jesse Toprak, executive director of industry analysis for Edmunds.com, adding that the industry-wide sales decline was in line with his expectations.

“Consumers want to buy cheaper, more gas efficient vehicles,” Toprak said.

If only presidential candidates would stop telling everyone how bad things were, then everyone would be rushing out to buy a Camaro.

Then again perhaps consumers are broke, have no job, have no job prospects, and gas prices are through the roof.

From Mr. Practical this morning:

I’d use the phrase “The Big One” to refer to what people will call this period in the future. This is where it all changed.

After years of credit inflation caused by excessively easy credit produced by central banks, around mid-2007 the major world economies, led by the U.S., finally began experiencing trouble in carrying all that debt. Debt levels in the U.S. reached six times their usual amount relative to economic production. As the credit began to deflate, liquidity driving asset prices quickly dried up. We’re now seeing those same central banks desperately attempting to reflate credit, only to see that borrowers are no longer in shape to borrow and lenders are no longer in shape to lend.

—

Yesterday some very large European dealers wrote off vast sums of debt. There will be more to come. But the market took it as the last write-down, just as it has in the past, and a vicious short covering rally ensued with the help of government hands behind the scenes. Desperation is everywhere. But don’t confuse a short covering rally in a bear market with a bottom in a bull market correction: the news will continue to get worse and the manufactured rallies will be fewer and fewer as deflation takes hold.

In all my years I have not seen anything like this. My overly conservative bent used to be commonplace, back in a time when investments produced cash and people invested accordingly. People used to evaluate a business on what it actually produced, not where it could pretend to mark its assets as a form of return.

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…there’s no place the banks can go except to write-down more the value of the enormous debt they are carrying on the books. Those buying financial stocks now say the loans have been written down enough. The problem with this logic is that if they are right about default rates they are wrong about how much banks will earn off the loans.

Even if those loans are near correct valuations for now, the stifling of the great credit machine will (has) caused a recession. The consumer’s in no shape to borrow and with the decline in the value of the dollar that need is rising not falling. As the recession takes hold the value of the loans will fall again (higher default rates) and the deflation cycle will continue until vast amounts of debt is written off.

This story’s not about three 400-point rallies in the Dow over the last month or so. This is a much bigger story: one that will unfold over the next few years. Traders will get chewed up in market volatility, we will be fed new saving regulations by government bureaucrats, and the media will mis-inform us all along the way.

I have always believed that Minyanville is not about catching the next few hundred point rally; with this volatility there are no odds in trying to predict it. With this volatility being short stocks is very risky and making money that way will be left to only a very few traders. I believe Minyanville is one of the few venues where the truth is discussed with no hidden agenda. That’s going to be very valuable over the next few years.

Higher stock prices aren’t less risk: They’re more. With treasury rates so low it’s obvious that a good amount of people are seeking lower risk while central banks want them to seek higher. You have to decide for yourself where we are and all I can do is present some real facts for you to make that decision.

The best advice I can give is the same. Stay out of debt, try to save money (even though the government is making it nearly impossible to do so) and keep risk low.

After taking an early dip, the indices have recovered and we’re seeing just a bit of follow-through on yesterday’s big move, running the S&P right up to that 1375 area. A/D lines are green and most groups are green as well, with the homebuilders, brokers and gold stocks leading the way, while the HMOs drag to the downside.

Treasuries/yields are mixed. Energy prices are fairly flat. The dollar index is slightly lower, gold and silver a bit higher.

Deron Wagner this morning, on recent market movement:

Yesterday was the third time within the past month the major indices have gained more than 3% in a single day. The first two times were quickly met by selling pressure, but we think this time may be different for several reasons. First, the main stock market indexes each broke out above key intermediate-term resistance levels on their daily charts. Second, the rally was broad-based, not just led by a spike in the beaten-down financial sector. Third, quite a few individual stocks broke out or are about to break out of bullish consolidation patterns on the daily charts. Prior rallies in March were bounces off the lows in which there were very few tradeable patterns.

The breakouts above key intermediate-term resistance levels mentioned above were very similar among the S&P, Nasdaq, and Dow. Specifically, all three indexes moved above their prior highs from March 24/25. This enabled the second “higher high” to be formed since the uptrend began with the March 17 lows. More importantly, this also confirmed the breakout above their primary downtrend lines that have been in place for the past four months. Finally, all the broad-based indexes also zoomed back above their 50-day moving averages.

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Over the past few weeks, we’ve been suggesting the possibility that the broad market’s rally off the mid-March lows could become the start of an intermediate-term uptrend, not just a near-term bounce off the lows. Based on the reasons above, we now believe a broad-based intermediate-term uptrend will indeed materialize. Although we expect continued strength for at least the next three to six weeks, don’t forget we’re still in a primary bear market. Take advantage of the strength while it lasts, but just remember the new intermediate-term uptrend is still within the context of a long-term, seven-month downtrend.

We shall see how it plays out.

…before we’ve even admitted that it exists.

The recession that isn’t (or wasn’t) is already near over, according to Trim Tabs, via Mark Hulbert at MarketWatch (oh yeah, I believe everything HE puts up…).

Barry begs to differ.