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.

The morning jobs report got the futures traders a little excited going into the open, but the market just didn’t respond. The morning lift was sold off fairly quickly, and all the indices dipped into the red in the early afternoon, before getting pushed back up into the close and finishing mixed.

The Nasdaq, which ramped yesterday, lagged back all day today. The Russell dipped, and the Transports slipped on higher oil:

Treasuries slipped, and yields moved up:
6-month: 1.69%    2-yr: 2.46%    5-yr: 3.18%    10-yr: 3.86%    30-yr: 4.58%.

Internals were mixed, with volume slacking off. Advances/declines were 17 to 13 on the NYSE but 3 to 4 on the Nasdaq, with up/down volume 7 to 5 on the NYSE and just above flat on the Nasdaq. New highs/lows were 55/15 on the NYSE but 62/63 on the Nasdaq.

The groups were split, with the commodity stocks bouncing back after getting trounced for a few days: metals (+3.3%), oil services (+2.3%), natural gas (+2.2%), steel (+2.1%), gold and silver (+1.7%), oil stocks (+1.4%) and utilities (+1.1%). Giving up ground was computer hardware (-2.4%), airlines (-2.0%), paper (-1.4%) and homebuilders (-1.3%).

Energy prices made a strong comeback after stumbling for a few days. Crude oil jumped nearly 4 bucks to $116.32/barrel, gasoline rose a dime to $2.97/gallon, and natural gas gained ground to $10.77/mmBTU. The dollar index edged a bit higher, to 73.50. Gold and silver got a break from getting stomped on, with gold edging up to $856/ounce and silver moving up to $16.38/ounce.

BMB Note:   Another mini-reversal after the push-up at the open, but basically a flat day on lighter volume. Not much to write home about on either side.

The commodity areas got a bounce back today, and some of those energy names might get interesting if their uptrends resume out of the recent pullback - the same could probably be said for some of the fertilizers and some of the shipping names as well.

As for the rest of the market, it’s still leaving us wondering if it can continue with the upward move. I still don’t really like the ‘wedge’ shape in the major indices, but up is up, and I can’t argue with the fact that those charts are still moving higher. It is what it is until it becomes something different.

So we’ve got most of the earnings out of the way, the Fed’s move is old news (even though they jumped out in front of the jobs report with more pawn shop promotions today - obviously they’re not done trying to keep the banks afloat), and we’re easing into what is historically a weak seasonal period. The next few weeks should give us a better idea of whether this move up really has legs or not.

If we’re to believe the talking heads on TV and the VIX, the economy is on the road to recovery (that’s assuming it was ever really weak at all!), the credit crisis is over and done with (even though the Fed’s swapfest is still growing), and new highs should be just around the corner. And that is probably good reason to be at least a bit skeptical.

From Mike Shedlock’s blog, his firm’s stance on current market conditions:

On March 24 I reported that the firm I represent, Sitka Pacific Capital Management, moved its allocation model from market neutral to long. Prior to that we had been fully hedged in our “Hedged Growth” strategy from August of last year until late March.

This rally, in spite of what many think, has been weak and corrective looking. Volume has not been impressive. Over the last two days we have reduced exposure and are now back to a fully hedged state. We do not like the risk reward setup here.

However, there are individual plays that seem attractive and we are still seeking those out. For example, we did not like the risk reward setup in gold at the time and sold our position at 980 on the way up, not down. Gold is much more attractive to us at these prices, so we have added partial exposure.

Like always we are striving to remain flexible. If gold or some of the energy plays we are in reverse back down, we will be out, and without notice.

Over the past few days, many have asked me about the strength of this rally and why it was occurring. The answer is that nothing moves in a straight line. The S&P dropped 20% over a 5-6 month period and the Nasdaq and other indexes even more. Some foreign markets, notably Shanghai, fell 50%. Simply put, bearish sentiment simply was too extreme. The reverse is happening now. The bottom is in calls keep getting louder and louder while the economic data is anemic.

April appeared to us to be not much more than a series of choppy, overlapping short covering rallies with air pockets below. If breadth, volume, and other indicators we are watching pick up, we are willing to change our minds. However, as of right now, we are comfortable being fully hedged in one strategy and high in cash in another.

This is not a recommendation to go short, or to take any specific action at all. Rather, I am merely stating our beliefs that risk and optimism are both too high for our tastes. Whatever is left of this rally, someone else can have it.

The market has lost quite a bit of its early ‘enthusiasm’, and the indices have pulled well back from their initial highs, with the Nasdaq now back near the flat line and the Trannies in the red.

Still more green than red in the groups, with the day’s leaders up to this point being the metals, gold and silver, steel, natgas, oil services, oil and utilities. Losing ground are the computer hardware stocks and airlines.

Treasuries are lower, yields up. Energy prices are higher. The dollar index is up a bit, gold and silver are higher as well.

I just saw the banner line on CNBC showing that April “goods producing jobs” were supposedly down 110,000 and construction jobs were down 61,000, yet the bottom line number was only down 20,000.

Makes you wonder where so many jobs were added, doesn’t it?

Oh, c’mon. I’m supposed to believe that they were added in the financial industry and retail?

Service industries, which include banks, insurance companies, restaurants and retailers, added 90,000 workers last month, the most this year, after an increase of 7,000 in March, today’s report showed.

How ’bout 267,000 jobs added by the magical birth/death model? That’s more like it. This magic model added 45K construction jobs, 72K ‘professional and business services’ jobs, and 83K ‘leisure and hospitality jobs’ (a total of 162K L&H jobs in the last three months).

Larry McMillan finally sees a bullish breakout - but it’s already accompanied by caution signs (click here for column with charts):

At long last, there has been a resolution to the standoff regarding the market bumping up against the 1400 area of $SPX — and it has been resolved with a strong upside breakout. Whatever technical short-comings might have accompanied this breakout, it should be propelled for a while by short covering and momentum trading. That should be able to drive $SPX to the former 1440-1450 resistance area at least. The 1390-1400 area, which was a major resistance area at which bulls and bears “did battle” for nearly two weeks should now serve as support. Any failure below 1390 would negate this breakout.

The equity-only put-call ratios have correctly remained bullish since late March. The standard ratio (Figure 2) is in the midst of its recent range of values, but the weighted ratio (Figure 3) has already descended most of the way towards recent historical lows — suggesting that this rally is closer to the end than the beginning. This is one of those technical short-comings. Regardless, these ratios remain bullish as long as they are descending on their charts.

Market breadth (advances minus declines) has not been strong (another technical short-coming). In fact, sell signals were generated twice in the past couple of weeks because breadth was not expanding. Nevertheless, the market has broken out on the upside anyway. Today’s upside breakout was accompanied by strong, but not overwhelmingly, positive breadth and so the recent sell signals have been canceled out. Still, unless breadth continues to expand over the next few days, this indicator will move back into sell status.

The volatility indices ($VIX and $VXO) have continued to decline since mid-March and as such have been on buy signals. As long as this downtrend in volatility continues, it is conducive to the bullish case. $VIX is now at its lowest levels since last December. At that time, the market reversed quickly and a bearish market leg developed. Currently, any reversal by $VIX back above 21 would be a warning sign, though, and a move above 23 would be a bearish signal.

In summary, this breakout is bullish and one has to trade from the long side as long as the indicators — especially $VIX and the equity-only put-call ratios — remain bullish. But don’t get complacent, because the technical short-comings noted above are caution signs.

Deron Wagner this morning:

…the laggard S&P 500 is now kissing its weekly downtrend line, while both the Nasdaq Composite and Dow Jones Industrial Average have marginally moved beyond their downtrend lines. Does this mean the Nasdaq and Dow have broken out and are no longer in primary downtrends? Not necessarily. Quite frequently, indexes, stocks, and ETFs probe above resistance of their downtrend lines (or below support of their uptrend lines) before resuming their dominant trends. Such moves fool traders into thinking the trends have reversed, which has the effect of washing out the “weak hands” who are actually on the correct side of the dominant trend (down in this case). This, in turn, makes it easier for the dominant trends to resume after the trend traders have thrown up their hands in exasperation. In the current scenario, the dominant long-term downtrends may not resume until all the short sellers eventually give up and the bulls begin to feel complacent. The current probes above the weekly downtrend lines is probably starting to have that effect right now.

In addition to the downtrend lines…, notice that volume has been lighter throughout last month’s uptrend than during the sell-off that preceded it. This tells us institutional buying has been pretty minimal on the way up. Further, be aware that the main stock market indexes are quickly closing in on resistance of their 200-day moving averages. Rarely does an index breakout above or breakdown below a 200-day moving average on the first attempt. However, if the major indices somehow manage to blast through 200-day MAs and hold above them, the long-term bias will shift to neutral.

Lacking subjective opinion and calling it simply as the charts present themselves, this is still a countertrend bounce within the context of a dominant bear market. Nimble short-term traders can and should take advantage of the strength while it lasts, but please don’t be complacent! Because there are very real technical reasons why stocks could reverse at any time, tight, disciplined stops and quicker profit taking is the name of the game.