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 Dow was ‘up’ four out of five days this week - but gained less than 100 points.

For those that enjoy the “thrill of the chase” - just make sure you can find a chair if the music stops:

Charts courtesy of StockCharts.com

Pump ‘em up, knock ‘em down, and pump ‘em up some more. That pretty much sums up the day.

They were able to bounce things up a bit today and hold them there - at least better than they did yesterday, although even that was looking a bit doubtful around lunchtime. But a surge in the last 90 minutes pushed the indices up near their highs of the day:

Treasuries got smacked again, and yields continue to cruise higher:
6-month: 2.24%    2-yr: 3.04%    5-yr: 3.73%    10-yr: 4.26%    30-yr: 4.79%.

Internals stayed positive, though volume was lighter, and the lightest of the week on the NYSE. Advances/declines were 11 to 5 on both exchanges, with up/down volume about 3 to 1 on each. New highs/lows didn’t show much improvement, however, at 33/95 on the NYSE and 34/137 on the Nasdaq.

All of the groups finished green - yes, even the horrific banking index finished just above the flat line. Leading the rebound were the brokers (+5.1%), steel (+4.6%), airlines (+4.3%), metals (+3.7%), retail (+3.2%), homebuilders (+2.8%), semiconductors (+2.7%), internets (+2.5%), transportation (+2.2%), chemicals (+2.1%) and computer tech (+2.1%).

Energy prices pulled back a bit. Crude oil dropped a couple of bucks to $134.88/barrel, gasoline lost seven cents to $3.46/gallon, and natural gas dropped 20 cents to $12.61/mmBTU. The dollar index edged above the 74 level to 74.13, but the PMs held their ground gold and silver were unchanged at $869/ounce and $16.48/ounce.

BMB Note:   Geez, I thought they were gonna shut this thing down at noon today. Not much was happening for much of the day after the morning flurry ended. Volume had dried up to next to nothing, and it felt like everyone had gone home for a three-day weekend - except there isn’t one. But then they started pushing buttons again late in the day to ramp things up into the close.

We expected to see some bouncing sooner or later, and they got some of it to stick today. I wouldn’t be surprised to see a little more bounce stick with expiration week coming next week, but until things change, I have to side with McMillan on this one: “We think any such rallies should be sold.”

If you insist on being long a struggling market, stick close to the few strong areas: misc. oils and chemicals, fertilizers, coals, steel and other metals. But have your stops in place and honor them in case the winds start to howl through those groups too. I will continue to look to add to short positions as I see fit.

Somehow, I just don’t think that this would be enough to save Social Security. But that doesn’t mean they won’t try it. And when it isn’t enough, they’ll come back for more.

Some of these people running for office could be very harmful to your wallet. Pay attention to what they’re saying…

Some good charts showing the April/May CPI year-over-year breakdown by category - click on the image to see them at EconomPic Data:

Hat tip to The Big Picture.

Another morning push higher on all of the “good” news, like higher inflation and lower consumer sentiment. The indices are sporting gains of around one percent, and A/D lines are well in the green - we’ll see how the day goes from here.

Nearly all of the groups are green, with only the banks continuing to stink it up. Those things just look like death - take a look at the chart of FITB to see what I mean. Leading the green groups at this point are the steels, airlines, brokers, semis, metals, retail and computer tech.

Treasuries have bounced up off early lows, bringing yields back down a bit. Energy prices are slightly lower. The dollar index has crept above 74, gold and silver are a little lower.

Although I’m not sure why we pay any attention to these numbers anymore, here they are:

The seasonally adjusted consumer price index rose 0.6% in May, worse than the 0.5% gain expected by economists. The core CPI, which excludes food and energy prices, rose 0.2% as expected.

Funny how the ‘core’ never rises more than 0.2%, isn’t it? But I guess they couldn’t find any way to ‘adjust’ the energy prices downward this month.

The CPI is up 4.2% in the past year and has risen at a 4.9% annual pace over the past three months.

—

While headline inflation has been red hot due to soaring crude oil prices, core measures of inflation have barely budged, a comforting sign that an inflationary spiral has not taken hold. The core CPI is up 2.3% in the past year, and has risen at a modest 1.8% annual pace over the past three months.

Yeah. Right. Whatever.

Index futures are up on the good news of higher inflation. I need a beer for breakfast.

Hmmm.

Think it’s just a ‘coincidence’ that all of this tough-on-inflation and ’strong dollar’ talk was taking place right before the G8 meeting was getting started?

I think not.

And while we’re on the inflation/dollar topic, Jim Sinclair has a few comments:

Today’s urban legend was the proposition that Bernanke is about to morph into Paul Volcker, the inflation fighter.

Let us look at that proposition in the cold view of fact. Primarily Bernanke would need the support of the present Administration as Volcker enjoyed during the early 80s.

Having that support, which is most unlikely, Bernanke would then have to:

1. Slam monetary aggregates down, primarily the hidden M3, hard and fast. There are questions if in fact that can even be done mechanically.
2. Close down the Begging Bowl loan window at the Fed; something that is currently called auctions. Demand repayment of the so-called but perma-rolled over 28 days loans by not rolling them over at the next auction.
3. Be willing to allow financial bankruptcies to go bankrupt.
4. Not be swayed by pleas for help from the good ole boys at derivative-rich international investment banks.

That is ludicrous under present circumstances and therefore will not happen.

The Urban Legend then goes on to point out the following:

The markets are discounting a 1% interest rate increase by year end. Yes, that is so, but always keep in mind that rates where currency levels are concerned is a game of net competitive rates, not the static rate levels of either the dollar or euro. That is to say the differential rates between the rate of return on US dollars and the rate of return on euros is a criterion to valuation. With the present ill will between Trichet and Bernanke you can be sure that the ECB would call and raise on any move by Bernanke. The net differential interest rate would then remain the same or favor the euro. The dollar at best would remain the same, but more likely decline.

The message transmitted to businesses by a fight for the net differential rate of return between the dollar and the euro would seriously discourage economic activity. Tax revenues for cities, states and the Federal government would all but disappear, causing every dollar sensitive deficit to explode.

Such a chain of events would be the kiss of death for the dollar. As goes the dollar so goes gold, but in the inverse.

Larry McMillan’s indicators have clearly turned bearish - click here to view column with charts:

The breakdown through several support levels by $SPX has ushered in some very negative market action — likely setting in motion the next downward leg of the bear market. Things have really accelerated this past week with the breaking of the 1370 level. That area now represents major resistance, with several other levels above it. As for support, there may be some near the April lows at 1325-1330, as today’s decline bottomed near that level as well (1331).

The equity-only put-call ratios have remained steadily on the sell signals that they first generated about three weeks ago. The standard ratio (Figure 2) had a bit of a “wiggle” when $SPX was fooling around at the 1400 level, but that was quickly dispensed — and a solid sell signal confirmed — when $SPX broke down below 1390. As you can see, they are still relatively low on their charts and likely have a long way to rise while still on these sell signals. As long as they are rising, that is bearish for the broad stock market.

Market breadth has been abysmal on this decline, and as a result breadth is in oversold territory. That does not mean, however, that one can buy the market, for severe declines often occur during an oversold condition.

The volatility indices have established uptrends, and that is bearish. The confirmation of this $VIX sell signal came last Friday when $VIX spurted substantially higher as the market dropped. That established a pattern of higher highs and higher lows for $VIX, which defines an uptrend. As long as $VIX remains in this uptrend (Figure 4), it is bearish for the broad market.

In summary, we have no buy signals from our indicators. However, we do have oversold conditions. Thus a short-lived and potentially powerful rally could spring up at any time. We think any such rallies should be sold.

We think that this new down leg is strong enough that it will have to be resolved with a typical capitulation low — involving a spike peak in $VIX and put-call ratio buy signals near the top of their charts. By the time all that happens, it would not be surprising to see $SPX in the neighborhood of the March lows. If so, it will be interesting to see whether or not a “retest” holds.