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 sent the dollar index to new closing lows today??

Chuck Butler had his eye on it bright and early this morning in the Daily Pfennig:

Well… Front and Center this morning, I have to tell you that Eurozone inflation came in higher than expected (more in a minute), and that news has the euro pounding the dollar into submission…

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Inflation in the Eurozone bumped even higher than the previous 3.5%, hitting the 3.6% level in March. This represents the fastest pace of inflation in 16 years… I don’t think the ECB is going to go forward with a rate cut in May, or anytime soon for that matter! Recall, that a couple of weeks ago, I pulled the May rate cut forecast because of this nagging inflation, and now it’s gone higher!

I don’t think it means the ECB will entertain a rate hike… But, it certainly means they will not entertain a rate cut either! And THAT, my friends, is what is driving the euro higher this morning. ECB rates will remain steady Eddie, while the U.S. rates are going lower, and lower… How low can you go? Recall, that I told you a couple of weeks ago, that I fully expect 75 BPS total of rate cuts from the Fed at the next two meetings… That would bring rates here in the U.S. to 1.50%… The Eurozone would have 250 BPS in their favor… I don’t have to tell you that 250 BPS represents a HUGE Differential, and that favors the euro!

	Lotsa noise again today, but no real progress yet.
	Intel caused a lot of noise in the semis too, but still no breakout there either.
	The metals are a different story, as they are on a roll.
	And I have to admit that I am baffled by the continued rise in the Transports, what with airlines falling apart left and right, and daily record highs in oil and gasoline prices.

Charts courtesy of StockCharts.com

Here we go again. With this market, you just never know what’s around the next corner. The problem is, you keep driving and driving, but you never really seem to get anywhere…

The indices made yet another mad dash toward the top of their trading ranges day, helped out by some supposedly positive earnings reports, and ignoring more new record high energy prices.

The Transports shot back up, paying absolutely no attention at all to gasoline at $2.93 a gallon - and that’s in the futures market, never mind at the pump:

Treasuries crumbled, and yields shot higher:
6-month: 1.50%    2-yr: 1.97%    5-yr: 2.82%    10-yr: 3.68%    30-yr: 4.48%.

Internals were, of course, positive, and volume finally increased from the recent low levels. Advances/declines were 5 to 1 on the NYSE and 14 to 5 on the Nasdaq, with up/down volume 7 to 1 on both exchanges. New highs/lows were mixed, at 115/20 on the NYSE but a negative 41/88 on the Nasdaq.

The groups were big and green, led by metals and mining (+6.1%), gold and silver (+5.8%), semiconductors (+5.5%), steel (+5.0%), chemicals (+4.8%), homebuilders (+4.7%), transportation (+3.9%), REITs (+3.9%), commodities (+3.9%), paper (+3.5%) and banks (+3.4%).

Energy prices just continue to shoot higher, helped by poor inventory data and another tumble in the dollar. Crude oil rose to yet another record, ending the day at $114.85/barrel. I don’t even want to imagine what gasoline prices are going to be at the pumps soon, with the futures up another nickel to $2.93/gallon. Natural gas added 20-some cents to $10.42/mmBTU. The dollar hit new lows against the Euro, sending the dollar index back down to 71.43. That helped send gold back up to $945/ounce and silver jumped 50 cents to $18.29/ounce.

BMB Note:   So, we get yet another sharp rally in this spastic market. How many is that now in the last 4 months, eight, nine, ten? Do we have any reason to believe that this one will lead to anything more than the others have? Well, not at this point, at least in my mind. The major indices still remain rangebound, and a day-and-a-half doesn’t make a trend - and we have to remember that it’s expiration week, and earnings news is also helping to toss things around.

That said, strength remains in a few areas: fertilizers, select energy and coal, some of the transports (ex-airlines), esp. railroads, solar stocks, etc. But frankly, I think some of those groups might be getting a little frothy here… And if those areas ever start to stall, there had better be something to take their place. The narrowness of the market reminds me a bit of what we saw last fall in the big-cap techs, except the current leaders aren’t nearly as big a part of the major indices, so they’re not able to carry the indices to new highs.

Gold stocks looked like they might be coming back to life today, but they’ve been pretty messy of late. The semis had another big day - but that’s after looking like they were going to croak just a few days ago. They obviously can’t make up their minds. As for the other groups, many of those were just bounces in their continued bear markets.

And even though stocks are ignoring them for a day or two, I don’t think we can keep ignoring these incredibly high energy prices, and over the past couple of days, we can add higher interest rates into the ‘worrisome’ mix as well. We’ve seen sudden jumps in the 5-year, 10-year and 30-year yields in the past day or two, and if interest rates ever do turn higher and stay there, that will throw a wrench into things as well.

So we’ll see what happens. Just try to keep your feet on the ground amidst all the noise. Maybe everything really is turning to roses and we’re beginning the next big bull market. But then again, maybe not. If you’re going to play, stick to those stronger areas - it’s far too early to just buy ‘the market’. After all, how do you know when this market isn’t going to turn right back around and sock you in the gut? It’s done it over and over since January.

To some, all news is good news, all of the time.

From today’s Five Things:

1. Housing Starts at 17-Year Low; Let the Spin Begin

Housing starts in the U.S. in March fell to a 17-year low, according to the Commerce Department, a decline that was more than twice as much as economists’ forecast. But even a miss of that magnitude wasn’t enough to put a cork in the positive spin.

According to some, the decline in housing starts to 1991 levels is actually good news. Why? Simple math. Given the current massive overhang in housing inventory, it’s far better for housing starts to be low, rather than high.

Sure, that spin carries a certain ring of logic to it, but we’re not so sure housing starts, or lack thereof, affords us the luxury of “a positive datapoint” simply because the logic of fewer houses being built folds neatly into our hopes and dreams of a bright future.

There is a reality to the figures that shouldn’t be ignored; namely, that housing starts data is used to compute the Conference Board’s U.S. Composite Index of Leading Indicators, which is in turn used by the Federal Reserve Open Market Committee in its decision-making. 

It is interesting that during the housing boom, increases in housing starts were widely viewed as a positive leading indicator, signifying that consumers were eager to buy homes, eager to borrow and ready to spend still more money on goods that go part and parcel with new homes; furniture, appliances home and garden supplies. Now, as that boom unwinds, the view that a 17-year low in housing starts is also a positive leading indicator is a bit tough for us to embrace.

David Nelson says that people need to quit looking so hard for ‘the bottom’, especially where the financials are concerned:

For nearly a year, professional and individual investors have been trying to catch the falling knife in financial stocks even though it sometimes resembles a guillotine. We buy these stocks uttering phrases like “the bad news is priced in,” “exceptional value” or “the high dividend yield is paying us to wait.”

Investors who have been patient over the last year and have resisted the temptation to wade into the water were probably forced in with last month’s surge in the sector as hope became the prevailing sentiment. We know the market and stocks are a forward-looking mechanism, so the theory goes that when these stocks start their ascent they’re telling us six months from now the fundamentals will be apparent.

Sometimes the market looks forward and sees a mirage and six months later investors find themselves drinking sand.

While recent Fed actions have taken Armageddon off the table for financials, it doesn’t change the fact that the likely continued decline in housing prices eliminates whole divisions dedicated to servicing a mortgage market that will take many years to repair.

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This myopic focus on trying to get the bottom takes our attention away from the industries and companies that are working. Contrarians come out of the woodwork calling for a top in every sector that is doing well, has pricing power and is outperforming the rest of the market. The strong stocks are always perceived to be a bubble and weak stocks have value.

Market trends tend to have staying power in both directions. How long have we been hearing that commodities and energy are at a top or that financials are at a bottom? The truth is that when there is a real turn in the earnings power of brokers there will be plenty of time to make money even if you aren’t in at the bottom. The sector will probably be poised to outperform for years. Let’s not make things worse by guessing.

In the last bear market we saw exactly the same type of action, except the troubled sector was technology. All along the way, as the NASDAQ retreated from 5000 to nearly 1000, there were vicious rallies in technology stocks, forcing money managers to maintain some exposure in a sector clearly in decline. When the real bottom came in 2002, no one cared. Investors weren’t talking about tech anymore. If someone mentioned Cisco (CSCO) at 10 most would yawn.

I suspect it will be the same for financials. When the financial media stops asking guests if they think this is the bottom in financials, that will probably be the trigger for a sustained move higher. Like most bottoms, very few will notice.

As many have said before us, we will finally see ‘the bottom’ when no one wants in anymore. And we are far from that stage right now - just take a look at what’s happening today, for example.

True ‘bottoms’ do not occur when everyone and their dog is standing with their wallet in hand (or paw), ready to jump in and buy as soon as the opening bell sounds.

As was indicated by the futures, the market is having a happy day as it goes on a mission to kill off the shorts again. Indices are showing decent gains, with A/D lines solidly in the green for the day thus far. Leading the way up are the steels, gold and silver stocks, homebuilders, semis, metals, banks and chemicals.

Treasuries are fairly flat. Energy prices are also fairly flat as they await the weekly inventory data. The dollar took a nasty dive overnight, and gold and silver are higher.

Update:   Energy prices have taken another jump, as the inventory data showed larger-than-expected drawdowns in both crude and gasoline. Crude at $114, gasoline at $2.90. But stocks don’t care.

Deron Wagner points out a new ‘pure play’ solar energy ETF in his column this morning.

Hopefully they’re not top-ticking the solar stocks here…

The futures are still riding high after Intel’s ‘beating’ their own reduced earnings expectations last night (these companies have learned the Wall Street ‘game’ quite well, haven’t they?).

For those of you that still give any credence whatsoever to the government’s inflation numbers, the March CPI was out this morning.

But some pretty poor housing starts numbers might serve to keep some folks grounded in reality.

Calculated Risk has the cliff diving action shots (click image to be teleported to CR):