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.

What would Friday be without a nice juicy downgrade? Oh, are we back to the bond insurers? Remember them? You know, those guys that everyone was talking about “pre-Bear Stearns”.

From Calculated Risk:

Fitch Downgrades MBIA

From Bloomberg: MBIA Loses AAA Insurer Rating From Fitch Over Capital

Fitch Ratings cut the rating on MBIA Inc.’s insurance unit to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking.
…
Fitch issued the new, lower rating even though Armonk, New York-based MBIA asked the ratings company last month to stop assessing its credit worthiness.

Gary Kaltbaum, on his radio show today:

…I gotta tell ya. We’re up a little bit off the lows, still decently off the highs, still a ton of carnage out there on individual stocks and sectors, and I’m already asking myself the question: “Where did all the bears go?”

I’m not talking about the perma-bears that are always bearish, I’m talking about bears. I’m see a little bit too many converts…I’m talking to bullish!

Me? I’m just not bearish anymore, and I’m hopeful. I’m hearing so many calls of “the bottom is in”, “the bottom is in”, and I have to tell you when all is said and done: I’ve never see a bottom of a bear market called by so many people!

So short-term, things are acting better — except maybe financials — but I gotta tell ya…I’m not so sure we don’t have some ‘revisitation’.

I hope we don’t. I’m just letting you know, I’m trying to figure out where all the bears went! Where is all the doubt? I’d like to see some more…

It’s good to hear Gary back on the show after a little health problem this week, and we wish him well. We hope that everything is fine, and that it continues to be in the future!

Peter Schiff’s description of Ben Bernanke’s testimony this week reminds me of the Family Circus cartoon and the little “Not Me” gremlin:

Those blindsided by the recent financial meltdown are now loudly blaming the free market for its failure to police its own excesses, and are calling for greater regulation to prevent future disasters. But for those who clearly observed the problems developing (in high definition slow motion) the blame can be directed squarely at the policies of the Greenspan/Bernanke Federal Reserve. As has been the case countless times in history, the free market will now pay the price for government incompetence.

In Senate hearings this week, all parties involved completely ignored the Fed’s own culpability in igniting the speculative fever. It’s as if a senior prom had turned into a wild bacchanalia, and angry parents now question why the chaperones failed to notice the disrobing or why the DJ played provocative music, all the while ignoring the bearded gentleman pouring grain alcohol into the punch bowl.

A perfect illustration of the Fed’s failure to take responsibility can be found in Bernanke’s explanations regarding inflation, which he solely attributes to the effects of the rapid increase in global commodity prices. He failed to mention that commodity prices are rising as a direct consequence of his monetary policy, which is debasing not just the U.S. dollar, but currencies around the world. Rather than accepting the blame for creating inflation, Bernanke is shifting the blame to the free market. The Senators are happy to let him get away with it as it provides more evidence to support the “need ” for more government to save the economy from the disastrous effects of unbridled capitalism.

When asked how we got into this mess, Bernanke replied that our problems resulted from an excessive credit bubble characterized by aggressive leverage, reckless lending, and extreme risk taking. Absent from his explanation was the Fed’s role in irresponsibly setting interest rates below market levels, which mispriced risk, got the party started and kept it raging into the wee hours of the morning. The expressed goal of the Fed for much of this decade was, and is, to encourage and facilitate borrowing and lending.

There’s more where that came from.

Thanks for the pointer goes to the Features of the Week at Finance Trends Matter.

Third time’s a charm?

If the indices are able to push higher from here, does it mean “the bottom” is in? Not necessarily. The S&P 500 staged four rallies of 200+ points — of varying duration — during the decline from the 2000 top, before finally putting in THE bottom in the spring of ‘03.

And you can bet that each time the index rallied up, we were told that ‘the bottom is in’.

Some of the groups showing recent strength have included the metals, steels and chemicals, back up to or making new highs, the oil services coming out of a rough patch, and the biotechs surging off the lows:

Charts courtesy of StockCharts.com

Today was a good example of just how fickle this market can be.

After a dip in the early going, following the poor jobs report, the market staged a recovery and ran things back up nicely into the green. But like so many ‘rallies’ lately, this one ran out of steam, and was sold off throughout the afternoon, bringing the indices back to right around even by day’s end.

Treasuries moved higher, pushing yields slightly lower:
6-month: 1.52%    2-yr: 1.82%    5-yr: 2.62%    10-yr: 3.47%    30-yr: 4.31%.

Internals finished slightly positive, with volume again on the light side, about the same as yesterday. Advances/declines were 5 to 4 on the NYSE and 15 to 14 on the Nasdaq, with up/down volume flat on the NYSE but a positive 11 to 8 on the Nasdaq. Finally more new highs than new lows: highs/lows were at 61/9 on the NYSE and 34/35 on the Nasdaq.

The groups were mixed, with commodity areas filling most of the top spots on the winners list: metals and mining (+4.3%), steel stocks (+3.1%), biotechs (+1.8%), gold and silver (+1.8%), chemicals (+1.6%), natural gas stocks (+1.5%), oil services (+1.5%) and health care products (+1.5%). Financials and real estate led the losers: banks (-2.2%), brokers (-1.7%), REITs (-1.6%), homebuilders (-1.5%), computer hardware (-1.3%), insurance (-1.2%).

Energy prices were mixed. Crude ran up more than 2 bucks to $106.23/barrel, and gasoline isn’t backing down, still at $2.75/gallon, but natural gas dropped a few cents to $9.33/mmBTU. The dollar gave up ground on the weak jobs numbers, with the dollar index slipping back to 71.95. The precious metals gained back some lost ground, with gold up to $914/ounce and silver having a strong day, gaining 39 cents $17.74/ounce.

BMB Note:   I’ll say the same thing I said yesterday: the bulls had their chance again.

And my second thought from yesterday is the same as well: “I thought at one point, late in the morning, that the market might actually make a run for it and get out of this range. Things had recovered from early lows, and a few stocks were moving up and hitting new highs. But the momentum only lasted so long, and then not only did things not move higher from there, they completely fizzled into the close. Not a great sign.”

Ditto for today. Two days in a row.

This market hasn’t shown much of a willingness to go lower, but it sure is having a struggle breaking free from the trading range that it’s been stuck in for weeks now. There is some rotation going on in the groups, and some are moving out to new highs, but lately the ‘rotation’ hasn’t stuck very well - we’ve seen groups move out and look great for 3-4 days, and then turn right back down.

We’ll be patient - continue to look for possible opportunities on the long side, and we might give some of them a shot if we find ‘em. But we’ll have to be careful. This certainly isn’t an environment where we can be diving in head first. You might be able to stick a toe in here and there, but watch your step. There might be a dropoff just in front of you that you can’t see through the murky water.

Stocks are limping a bit as the poor jobs report took a little wind out of the bulls’ sails. Indices are slightly red, A/D lines are slightly negative as well, with the groups nearly evenly split.

Leading to the upside are the natgas stocks, metals, biotechs, utilities, gold and silver stocks and oil services, while the homebuilders, computer hardware, semiconductors, banks, brokers, REITs and networkers lead the down side - many of those groups are right off yesterday’s winners list.

Treasuries are higher, yields lower. Energy prices are mixed - crude higher, but gas and natgas flat. The dollar index is slightly lower, gold and silver each a bit higher.

Larry McMillan’s indicators have taken a positive turn - click here for column with charts:

The broad stock market has a much more positive technical background. Our intermediate-term indicators are positive and on official buy signals. They had slipped some last week but never rolled over to sell signals. Then this week’s strong rally brought them back from the brink, and they remain positive.

The $SPX chart has, in some respects, become muddled. But its general trend is now up, so that is positive. $SPX sliced back and forth through supposed support and resistance levels between 1320 and 1340 several times in the last two weeks. Thus, those levels are no longer significant as support or resistance. However, the chart clearly shows a higher high, higher low pattern, as marked in Figure 1. This is the sort of thing that is necessary as the first step towards building a lasting uptrend. This pattern remains positive as long as $SPX remains above the uptrend (blue) line on the chart. On the cautionary side, there remains heavy resistance at 1390-1400.

The equity-only put-call ratios had flirted with new highs at the end of last week, but have since backed off and are trending downward again. Thus, they are on (re)confirmed buy signals. These put-call ratios are one of our most trustworthy and long-term indicators.

Market breadth has been relatively strong over the past few weeks. Last week’s decline was accompanied by only modestly negative breadth. Breadth strengthened on this week’s rally and has now moved to overbought status. That is bullish, as long as breadth continues to expand.

Finally, the volatility indices are bullish as well. They were the first to give intermediate-term buy signals, with their spike peaks back in mid-March (see Figure 4). However, $VIX had recently stalled near 25, but this week’s drop below that level (re)confirmed the buy signals here as well.

In summary, the bears had a chance to regain control of this market last week, when $SPX declined about 50 points (from 1360 to 1310). However, none of the intermediate-term indicators rolled over to sell signals, which was a bullish divergence. And their refusal to do so was justified this week when prices moved higher again. So, at a minimum, we expect $SPX to test the 1390-1400 level. If it can close above there, a much stronger rally can take place.

But does this mean the bear market is over, and we can load up on bullish positions? Not really, because there was considerable damage done during the January and March declines, and it would not be out of the question to have yet another retest of the lows near $SPX 1260 — much as there were three retests of the lows at the end of the 2000-2003 bear market. But for now, enjoy the bullish picture that has emerged.

The big NFP report wasn’t as healthy as the bulls would have wanted - it wasn’t healthy at all - but the futures are holding right around the UNCH mark for now.

We’ll see how the day goes, but as we’ve said, the market just isn’t in the mood to go down right now.

Update:  Calculated Risk has a couple of charts on today’s employment numbers, and a few comments:

Unemployment was higher, and the rise in unemployment, from a cycle low of 4.4% to 5.1% is a recession warning.

Also concerning is the YoY change in employment is barely positive (the economy has added just over 500 thousand jobs in the last year), also suggesting a recession.

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Overall this is a very weak report.