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 was looking back at the charts of the October top - when the market was running up after the first Fed ’save’, and the large-cap Nasdaq stocks were carrying the day for the most part. We see that the Dow (along with the S&P) topped out just before mid-October (the 11th) as the bank stocks started to crumble, but the Nasdaq ran up for another few weeks, into the end of October, finally topping on the 31st.

Fast forward to today, after a couple of months of run-up since the Fed-arranged Bear Stearns - JP Morgan shotgun wedding. The Dow double-topped (May 2nd, 19th) as the bank stocks started to head south again, but the Nasdaq has continued to run up for a few weeks yet, similar to what happened back in October. Did yesterday mark the top for the Naz? Even if it didn’t, what are the chances of the rest of the market getting very far when the Dow is breaking down this badly? Not very good, IMO.

The banks are in dire straits, and the homies look like they might be headed back there:

Gold and silver are rangebound after their big March drop, but we’re keeping an eye on them:

Charts courtesy of StockCharts.com

Nuts. Today was just plain nuts. From stocks, to currencies, to commodities, to economic numbers - the fur was really flyin’ today.

Well, at least this wasn’t one of those days when I was tempted to fall asleep at the screen.

The bulls had their way yesterday, but the tables were turned on them in a big way today, helped by a not-so-hot jobs report (what did they expect?), a weaker dollar, and through-the-roof energy prices. Stocks started lower and never even faked any sort of rally attempt. It was just selling, selling and more selling.

As you might expect, bonds moved higher, and yields came down:
6-month: 1.94%    2-yr: 2.40%    5-yr: 3.20%    10-yr: 3.93%    30-yr: 4.64%.

Internals were negative. Volume wasn’t humongous, but it was higher than we’ve been getting. Advances/declines were 1 to 4 on both exchanges, with up/down volume around 1 to 9 on each. The NYSE actually managed more new highs than new lows (79/70), but of course, not the Nasdaq (38/117).

The groups, with the exception of the gold and silver stocks (+1.7%), were a very ugly shade of red. Leading the huge list were the airlines (-6.9% - oh, weren’t they the big winners yesterday? Easy come, easy go.), banks (-5.3%), homebuilders (-5.1%), transportation (-5.0%), brokers (-4.9% - also big winners yesterday), paper (-4.7%), REITs (-4.3%), retail (-4.3%), defense (-4.0%), internets (-3.2%), hospitals (-3.1%) and insurance (-3.0%).

Energy prices added on to yesterday’s surge, running heating oil up to the limit and pushing crude up to new record highs. Crude has jumped more than 16 bucks in two days, closing today at $138.54/barrel on its biggest daily price gain ever. Gasoline added 22 cents from yesterday, a total of 36 cents in two days, to $3.55/gallon. Natural gas has been going along for the ride, rising to $12.73/mmBTU. Ben’s ’strong dollar’ speech from earlier in the week has been hammered by the ECB’s even tougher talk and weak data. That’s brought the dollar index back down to 72.38. Gold and silver rode the wave with oil today, with gold bouncing back up to $901/ounce and silver to $17.53/ounce.

BMB Note:   Ok, first off: thanks to all of you who responded to my query yesterday. The message was pretty clear - the market wrap stays, and I’m thrilled that people actually bother to read it. Thanks to all of you who take the time to stop by. It certainly is appreciated.

Whoa. A pretty wild couple of days.

I’m having a hard time believing that today’s action was a bullish development (though I’m sure Kudlow could find a silver lining in there somewhere), with the market coughing up all of yesterday’s big gains, and then some. Regular readers know that I’ve been of the belief that a topping process is underway, and we’re setting the stage for the ‘next leg down’. Today reinforces that view in my mind.

I’d been trading some very small short positions, and stuck with them in the face of yesterday’s pressure - that paid off today. But since the positions were very small test positions, it isn’t like I can retire on the proceeds or anything (oh wait, I’m already retired…I need another goal). I was hesitant to add to those positions after the big early move down, but I did take one more, one that hadn’t yet blown its ‘trigger’ point to smithereens.

For now, my market view hasn’t changed. I’ll likely continue to edge into the short side in various ways, but I’m really just trading around my core investment positions, which are still based on the three ‘C’s: Cash, Commodities and foreign Currencies.

The only broad-based major indices that don’t look like they’re getting into trouble - yet - are the Nasdaq(s) and the Russell. But if the deterioration in the others, like the Dow and the S&P, continues, those can’t be too far behind. The Dow and S&P both broke near-term support today, and badly. Sooner or later, the indices will get back in sync. Unfortunately, I’m having a hard time imagining that the Dow is going to turn things right around and run back up to its May highs to ‘catch up’ to the Naz and small-caps. It makes more sense to me, at this point, that the others will turn down and start to catch up with the big boys. Though the intermediate-term trend is still sideways, the short-term trend has clearly turned down for those biggees, and that fits with the longer-term trend off the October highs, which of course is also down.

In the groups, the banks continue to melt down and the homebuilders are looking to follow suit. Those are the groups that helped to get this whole mess started way back when, and they’re looking like they might want to lead the train through the dark tunnel once again.

Be very careful out there. This has been a very difficult market to trade, and I really don’t expect it to get a lot easier. Above all, protect your capital. We could see more days like today in the times ahead.

There’s something you don’t see very often.

From the banner on CNBC:   NYMEX heating oil goes limit up

I guess I shouldn’t be shocked - crude oil is up over 8 bucks, oops make that 9 bucks. Quite a day.

FYI - the limit on heating oil is 25 cents/gallon. The limit is also 25 cents/gallon on gasoline, and $10/barrel on crude oil. I think those limits apply only to NYMEX floor trading - the rules for the electronic trading may differ.

Update:   Some noise coming out of the Middle East this morning isn’t helping the situation, for sure:

Growing tensions in the Middle East also helped prop up oil prices. Israel sent aircraft, tanks and ground troops into the Gaza Strip on Friday, and a Cabinet minister hoping to replace embattled Prime Minister Ehud Olmert was quoted as saying Israel will attack Iran if it doesn’t abandon its nuclear program.

What a difference a good night’s sleep makes. Of course, if you throw a lousy employment report and near-record high oil prices - again - on top, it makes for a rather toxic mix.

Stocks have been suffering since the opening bell, and have already given back large chunks of yesterdays rally-from-nowhere. A/D lines are deep in the red, and most groups are pretty red as well, with only the gold and silver stocks and energies able to show a little green.

Treasuries are higher, yields a bit lower. Energy prices are jumping again, prompting the return of “America’s oil crisis”, according to CNBC. Apparently the crisis had ‘gone away’ for a few days - but it’s back. Crude oil, gasoline and natural gas are all higher. The dollar index is lower, gold and silver are higher.

If you believe any government numbers at this point: the non-farm payroll number out this morning showed a loss of 49,000 jobs, and the April figure was revised downward to -28,000 from -20,000.

The big news was in the unemployment figure from the household survey, which jumped from 5.0% to 5.5%.

Here’s the MarketWatch piece on the subject.

Deron Wagner on the current state of the majors:

Despite yesterday’s 1.7% gain, the laggard Dow Jones Industrial Average is still below resistance of both its 20 and 50-day moving averages, as well as its prior high from last week. If the bears happen to resume control, the Dow should continue to be a downside leader. Though it fell back to our original entry point, we’re still long the UltraShort Dow 30 ProShares (DXD). We’ve kept a loose stop on DXD, below the May 29 low, because we are looking to capture a significant gain. Larger price targets and longer holding times require looser stops than short-term “momentum” trades.

The Nasdaq Composite, on the other hand, broke out to close at its highest level since January 3 of this year, although it’s still a couple points below the intraday high of May 19. If it moves any higher, the “head and shoulders” pattern we’ve been discussing will be invalidated, thereby increasing bullish momentum. If buying the stock market, consider focusing your efforts on the Nasdaq-related sectors such as the Semiconductor Index ($SOX). As per yesterday morning’s commentary, we bought the Semiconductor HOLDR (SMH) when it moved above the high of its recent consolidation.

For technical traders, the bad thing about yesterday’s rally is that the S&P 500 is now in “no man’s land.” The index cruised back above its 20 and 50-day moving averages, but closed right below resistance of its prior high from last week. The S&P is also near the middle of its range from the mid-May peak to the early June low. As for the near-term direction of the index, both the bulls and bears could make sound arguments regarding the next anticipated direction of the S&P 500.

With the S&P 500 in “no man’s land,” the Dow still below major resistance levels, and the Nasdaq trying to break out to a new intermediate-term high, the major indices are obviously out of sync with one another. Whenever this occurs, trading typically becomes whippy and indecisive. To reduce risk, consider taking the following action: reduce share size on all new trades, maintain a minimal number of open positions, and have positions on both sides of the market (long the ETFs with relative strength, short those with relative weakness).

Larry McMillan sees some sell signals, but continued strength could change that picture (click here for column with charts):

This has been a volatile couple of weeks, with $SPX rollicking between 1370 and 1405 a couple of times. In fact, today it nearly traversed the entire range in one day. This sets up a potentially volatile unemployment report for Friday morning. In fact, that report was probably one reason why the market rose so much on Thursday. Has the data been leaked? Always possible, of course, but more likely is the fact that shorts did some covering on Thursday — and it got a bit carried away — so they didn’t have to buy into a potentially sharply rising market in the wake of a positive report Friday morning.

In the broader sense, we are not concerned with one set of economic numbers which the government has every reason to bias in its favor. Rather, we use the “purer” technical indicators of the market itself.

First, the $SPX chart is relatively neutral, with the index bouncing back and forth in the afore-mentioned range. However, the 20-day moving average is now declining, and so as long as that resistance at 1405-1410 holds, the index has a slightly negative bias. A series of lower highs and lower lows would have made the bearish case. But the index never closed below 1370, so that bearish sequence has not yet been established. At this point, a close below 1370 would certainly be bearish. Meanwhile, a close above 1405-1410 would likely indicate another run at the May highs.

The equity-only put-call ratios are bearish. The standard ratio (Figure 2) wavered a bit earlier this week, but re-confirmed its sell signal after that. The weighted ratio (Figure 3) has remained steadfastly on its sell signal. Since these are important intermediate- term indicators, we view their bearishness as meaningful.

Less meaningful is market breadth, which has been notoriously weak and somewhat indecisive all year. At the current time, the last signal was a sell signal, and technically that is still in effect.

The volatility indices ($VIX and $VXO) have been rising for the last couple of weeks. $VIX did establish a series of higher highs and higher lows (see Figure 4), and so this chart is now in an uptrend. An uptrend in $VIX is bearish for the broad stock market. Even today’s sharp decline in $VIX didn’t change that fact. A $VIX close below point 2 on the chart, at 17.83, would disrupt this bearish pattern.

In summary, the bears had their chance to break this market, but when $SPX failed to close below 1370, a massive short-covering rally took place (the market was not very oversold at the time, but there is always plenty of buying power — especially when it acts in concert). There are still sell signals from the put-call ratios and a bearish $VIX chart. But if $SPX closes above 1410 and if $VIX closes below 17.83, that would turn the picture bullish, despite the put-call ratio sell signals. We may find out quickly — as soon as today — if that will be the case or not.