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.

A few more groups may be wading into troubled waters:

Charts courtesy of StockCharts.com

A pretty lackluster finish to the week for stocks, as volume pulled back - but so did many of those leading commodity stocks.

The Russell finished around flat, while the rest of the indices hung below the zero line:

Treasuries continue to work there way back up, and nudge yields lower:
6-month: 1.74%    2-yr: 2.24%    5-yr: 2.97%    10-yr: 3.77%    30-yr: 4.52%.

Internals leaned to the negative side, but volume backed down again. Advances/declines were 9 to 10 on both exchanges, with up/down volume 4 to 7 on the NYSE and 4 to 5 on the Nasdaq. The Nasdaq new highs situation isn’t showing any improvement: new highs/lows were 60/38 on the NYSE but 26/118 on the Nasdaq.

Most of the groups were red, with the leading commodity areas pulling back a bit: steel stocks (-2.3%), gold and silver (-1.4%), drug stocks (-1.3%), metals and mining (-1.1%). The hospitals (+1.0%) led a short list of winners.

Energy prices were, of course, higher. What is that, something like 5 record days in a row for crude? Crude oil prices pulled back from an early morning move above $126, but worked their way right back up there during the day to finish at $125.96. Gasoline ran up another nickel, to $3.19/gallon - that’s a 32-cent jump in six days. Natural gas was also higher, back up to $11.54/mmBTU. The dollar index fell to 73.04. Gold and silver recovered from morning dips to finish near flat, with spot gold at $886/ounce and silver at $16.81/ounce.

BMB Note:   Another fairly weak showing for the market overall. Those commodity areas that have been the only strong groups pulled back, but it’s a little early to say it’s anything worse than that. Those areas have had a pretty wild run, so some ‘time out’ wouldn’t be unexpected.

The weak groups didn’t get a lot weaker, but housing, retail and the financials didn’t improve any either, and now we’re seeing some areas of health care, like the drugs and health care products look like they might be setting up for another move lower, along with the REITs. So we’ve got more areas to keep an eye on for outright breakdowns, though we haven’t see anything too drastic just yet.

At this point, overall, I think some caution would be prudent.

After the bell: FedEx warns. Happy Friday.

Charles Payne weighs in on the latest efforts in the government-as-landlord campaign:

The House of Representatives approved a bill that would insure $300.0 billion in mortgages. The highly anticipated and controversial bill introduced by Barney Frank passed 266 to 154 and now faces a possible veto by the President. This is an unprecedented and mind-boggling package. Often Congress will apply a band-aid when a tourniquet is needed: This time they are looking to mummify the problem when perhaps only a tourniquet is needed. I say “perhaps” because the question is there, as to how folks that are paying their mortgages (you might want to remember them as they are 90% of homeowners) are going to react. Without a doubt anyone on the margins thinking about tossing in the towel or maybe not living up to their obligation will be enticed to get in line and have the government become co-owner of the property.

According to the Congressional Budget Office, the bill will eventually costs tax payers $2.7 billion in addition to another bill that was passed which would provide municipalities with funds to buy and rehabilitate foreclosed homes.

—

The President has vowed to veto these bills in their present forms but there is a chance that Treasury Secretary John Paulson will craft a compromise. So at the end of the day I believe we’re all going to have greater exposure to the housing crisis even if the overwhelming amount of folks took good care to avoid the situation and lure of getting a home for nothing down.

With most fiscal conservatives already off the presidential bandwagon, the White House doesn’t have much to lose by compromising.

This is a heart-wrenching situation and it could have unintended consequences that change the real estate market forever, and not in a good way. There is also the slap in the face of those folks that saved up 20% down payments and keep up their payments. I suspect some will say those people are rich and have never had to worry, but I think those people are mainly factory workers, laborers, technicians, plumbers, teachers, firemen and other neighbors who simply did the right thing, which isn’t always easy.

The United Socialists of America gets just a little closer to reality…

Chavez and oil prices:

Oil rose above $126 a barrel for the first time Friday, bringing its advance this week to nearly $10, as investors questioned whether a possible confrontation between the U.S. and Venezuela could cut exports from the OPEC member. Gas prices, meanwhile, rose above an average $3.67 a gallon at the pump, following oil’s recent path higher.

On Friday, The Wall Street Journal published a report that suggested closer ties between Venezuelan President Hugo Chavez and rebels attempting to overthrow Colombia’s government. Chavez has been linked to Colombian rebels previously, but the paper reported it had reviewed computer files indicating concrete offers by Venezuela’s leader to arm guerillas. That appears to heighten the chances that the U.S. could impose sanctions on one of its biggest oil suppliers.

“If we put on sanctions, I’m sure Chavez would threaten to cut off our oil supply,” said Phil Flynn, an analyst at Alaron Trading Corp. “Obviously that would have a major impact on oil prices.”

The indices took a solid hit at the opening bell, but haven’t given up any more ground, and A/D lines are hanging just below flat. We see more red than green in the groups, however, with the commodity stocks pulling back, led by steel, metals, gold and silver, chemicals, oil services, oil stocks and drug stocks. Not a lot of green, with the homebuilders and networkers at the top of that fairly short list.

As stocks struggle, money moves back into bonds and is pushing yields lower. Energy prices are higher, but crude has pulled back from its early highs above $126, now just under $125. The dollar index is lower, gold and silver lower as well.

Gary Kaltbaum on recent market mayhem. I believe this column came out yesterday - not sure how I missed it - so when Gary says “yesterday”, he’s referring to Wednesday’s sizable drop:

Short but sweet to not confuse the issue!

Markets do not just top in a day, but they do give warning shots. Warning shots come just about the same way every time… with distribution and with leaders hitting a wall. This does not occur once, but multiple times before a market totally gags. For me, yesterday was just that… the first warning shot. I have seen distribution in past weeks but the leaders were fine. But yesterday, the market started coming after the leaders. HALF FULL - it may just be nothing more than pulling in the leaders… because they have had a good move. HALF EMPTY - it is the start of something more. I do not know which it is.

I do have a couple of issues here. Markets had been wedging up on unimpressive volume and the logical spot to hit a wall was near the 200 day. The DOW hit the brick wall right there. Other major indices have only hit the 150-day average. I do not guess here. I watch…and let the market tell me. If we start to see more distribution… if we start to see leaders puke… if the all-important FINANCIALS, RETAIL and SEMIS roll over, then we will be talking. I mention those three because they have been and remain the lagging groups. They would have to crap out to tell me the market is losing areas that have helped the market off the lows. Then, watch the COMMODITIES. These areas which I have talked incessantly, continue to lead. The market will not buckle until they buckle. You know the groups… STEEL, STEEL, and more STEEL, METALS - ORES, and of course, the OILS. Nevertheless, this will continue to be a very tough proposition both physically and emotionally. Take your time.

Lastly, I ask myself the question; why are the CEOs of the major financial firms as well as Uncle Hank now coming out to tell everyone that the worst is over for the credit crisis? I must say this unnerves me because these are the same people that said there was not a problem in the first place. These are the same people who delayed admitting their problems late in the game after first hiding them and lying about.

Are they now telling the truth or are they trying to talk the markets up again? These dudes just scare the heck out of me.

Here’s Larry McMillan and his merry band of technical indicators for this week (click here to view column with charts):

The bulls were having things pretty much their own way, after last Thursday’s big breakout to the upside, decisively over $SPX 1400. Moreover, strong gains were registered this past Tuesday, as the market reversed from down to up on a very strong day ($SPX was up 21, from low to high). But then the wheels came loose. First, a daylong decline on Wednesday took the averages down sharply. Then, today, there was a weak close. There’s no getting around the fact that this bearishness of the past two days — abetted by a sharply rising bond market (indicative of asset allocators moving out of stocks and into bonds) — is putting extreme pressure on the bullish case.

We have been saying that it would be negative if $SPX closed below 1390, for that would violate the 1390-1400 support area. It closed at 1392 on Wednesday. However, perhaps what’s more important is the rising trend line of $SPX and not the well-publicized 1400 support area (see $SPX chart, figure 1). The market has ways of confusing the majority, especially when the majority is all looking at the same thing (i.e., $SPX support at 1400). So, we wouldn’t say that the $SPX chart has lost its bullishness unless $SPX were to violate that trend and close below its 20-day moving average — both of which are near 1380 at the present time.

The equity-only put-call ratios remain bullish, as they continue to decline on their charts (Figures 2 and 3). The rate of decline has slowed for the equity-only weighted ratio and for the QQQQ weighted ratio, but that alone does not constitute a sell signal.

Market breadth has never been really strong all year. Then, on Wednesday, breadth readings were poor, breadth has now given new sell signals.

The volatility indices ($VIX and $VXO) remain in steep downtrends, and that is bullish. This is true, even though $VIX jumped higher on Wednesday (see Figure 4). As long as $VIX is below its declining 20-day moving average, it will be considered bullish. In fact, it would likely have to close above 21 in order to “officially” reverse the current bullish downtrend.

So, in summary, Wednesday’s sharp decline and Thursday’s poor close have put the bulls on notice. However, the recent uptrend is still intact at this point. We would change our opinion to negative if a) $VIX closed above 21, and/or b) the equity-only put-call ratios rolled over to sell signals, and/or c) $SPX closed below 1380. Those things are possible, of course, but not certain.