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.

More from Professor Sedacca in “What’s Next For the Credit Crisis? - Part 2“:

I find it interesting that so many companies, from General Electric (GE) to Merrill Lynch (MER), to KeyCorp (KEY) and National City (NCC) and Lehman have such lack of risk controls that they act surprised when the values of their securities suddenly drop and they have to write down assets. We need to be on the lookout for more of this activity as the assets held from everyone from hedge funds to mutual funds to financial institutions are about to face Phase 2 of the credit crisis, when loan performance continues to worsen as the stretched consumer pulls back from purchasing all but necessities and corporations find their inventories rising, which in turn leads to less manufacturing and finally higher unemployment. This will go on and on until the painful de-leveraging process is completed. This train of thought should help explain our cautious, and sometimes downbeat, view of equities and credit risk.

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In summation, it is my opinion that we need to continue to respect the credit crisis and its potential impact on other parts of the economy. Frankly, I can’t come up with a sector that isn’t either “damaged goods,” overvalued, or in many cases, both. As a result, we continue our cautious view in general, but will begin to focus on groups of equities and debt that will likely come under attack as the credit crisis makes its way through our markets and economies worldwide. We cannot forget a few valuable investment management commandments:

• The key to making money is not losing money. 
• Buy from the fearful, sell to the greedy. 
• Keep volatility of return low and avoid large draw downs. 
• Buy when you can, not when you have to. 
• Do not burn through “emotional capital.” 
• When in doubt, play small until the trend becomes obvious. 
• Better to lose opportunity than capital.

As we head into what may arguably be a tough couple of years, the seasoned investor with risk controls will likely come out on top. Those that have lived through credit crises before will emerge the likely winners.

Some of the indices and groups are just bouncing up into resistance at this point:

Charts courtesy of StockCharts.com

A lot of jockeying for position today. They run ‘em down, run ‘em up, run ‘em back down, and run ‘em right back up again. But I’m not sure that any real progress was made.

The Nasdaqs and the small-caps led the way all day…

Not a lot of movement in the Treasuries, holding yields fairly steady:
6-month: 2.36%    2-yr: 3.01%    5-yr: 3.73%    10-yr: 4.25%    30-yr: 4.78%.

Internals were positive, but volume backed off for the second consecutive day. Advances/declines were 3 to 2 on both exchanges, with up/down volume 3 to 2 on the NYSE and short of 3 to 1 on the Nasdaq. Still more new lows than new highs - highs/lows were 64/76 on the NYSE and 49/96 on the Nasdaq.

More groups were green than red, with some of last week’s losers coming back to the front of the line today: brokers (+2.3%), airlines (1.9%), gold and silver stocks (+1.7%), disk drives (+1.7%), semiconductors (+1.5%), banks (+1.4%) and REITs (+1.3%). The paper stocks (-1.5%) were the biggest losers.

Energy prices were mixed. Crude oil reversed off its early morning record to finish slightly lower, at $133.93/barrel, and gasoline slipped to $3.43/gallon, but natural gas added 30 cents to $12.91/mmBTU. The dollar index took a dive back down to 73.60. Gold and silver bounced back after a rough week last week, gold gaining to $883/ounce and silver up to $17.14/ounce.

BMB Note:   Not a lot to say about today. The techs helped hold the Nasdaq indices up and the small-caps performed well, but it’s hard to be too convinced that this is anything but some expiration week bouncing at this point. Speaking of the Nasdaq indices and the small-caps, if nothing changes, the Naz, Naz-100 and Russell have bounced up into what looks like possibly interesting ’short’ territory if the downtrend resumes.

We saw some of the usual suspects edge up to new highs again - the fertilizers early, then those coal stocks again. Someday…

With both the shorter-term and longer-term downtrends still in place, right now odds favor that this bounce will turn back down.

At least not in tech, as many would like to believe. From Bennet Sedacca, in “What’s Next For the Credit Crisis? Part 1″:

I’ve read recently that technology stocks are a “safe haven” in the equity market. The rationale, I’m told, is that you should buy Microsoft (MSFT), Cisco (CSCO) or Apple (AAPL) because “at least you can understand their balance sheets.” I can’t disagree that Apple’s balance sheet is much easier to understand than the labyrinth of leading investment banks and regional banks. However, if this is an investor’s sole reason for buying a stock, I would be wary of letting them manage my money.

If this is what the market has become, the best of the worst, then we had better start worrying as this is behavior of an equity bear market that is about to get “into gear” to the downside.

Think about who buys iPods, PCs and routers for a moment. On the corporate side, many of the largest buyers are those in the financial industry, the very ones that are being forced to raise capital just to stave off bankruptcy or the many smaller institutions that I fully expect to be merged into larger organizations in coming months and years. From the consumer side of the ledger, most consumers are stretched beyond their means. We also know that the majority of homes purchased with Alt-A and sub-prime mortgages now have negative equity. Not to mention the nearly $100 it costs to fill up a tank of gas.

Consumers are now officially tapped out and this helps explain why nearly 20% of all Americans have borrowed against their retirement accounts, a clear sign of financial stress.

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Retail sales numbers may have risen this past week, but most of it was as a result of more money spent on gasoline and higher prices paid per item purchased. This is not a harbinger for future growth; rather, it is a recipe for a deep and prolonged recession, which explains our caution.

So if you believe that technology companies are immune to the mess that began with banks and brokers, you may wish to re-consider. Earlier on, I mentioned that I need the balance of risk and reward to be squarely in my favor, and I now believe that the next sector that could be the new downside leadership if the market decides to have another leg down is technology. It is as close to being a safe haven as I am to being as good a golfer as Tiger Woods.

Faster guys–we need this stuff yesterday!!!

Honda’s new Fuel Cell car being released in painfully small numbers in Calfornia.

After an early dip, things have come off the lows and now sit straddling the flat line, with the Dow dragging the lowest of the three majors. A/D lines hang just slightly in the red.

The groups are split, with the gold and silver stocks, banks, brokers and metals leading the green team, while the airlines, hospitals, health care and utilities are at the end of the train.

Treasuries are near flat, yields are just slightly lower. Energy prices are higher. The dollar index is lower, gold and silver are higher.

Gary Kaltbaum on our lovable, ’spastic’ market - and we’ll look forward to those ‘beach’ reports:

There are two shows I rarely ever miss … Neil Cavuto’s Your World and Meet the Press. The reasons are simple: both hosts have those eyes that show you they know their stuff. Both have those eyes that show they care about their stuff. Both have the passion and intensity of what they cover. Both know how to cut to the chase when they interview and both suffer no fools. Tim Russert passed away a few days ago. I was at a service plaza driving south on the Florida’s turnpike when from afar, I saw a picture of Tim Russert on the tv. Something was screwy because the channel was turned to CNN. As I got closer, I knew something was wrong and then I saw his year of birth and then of his death. I can talk for hours about how good he was but I think his best attribute was his love of family. I urge you to get his book Big Russ and Me and you will understand. I will be reading his other book Wisdom of Our Fathers on my trip to Hawaii this week. This is one man that cannot be replaced.

For me, not much has changed for this spastic market. As a whole, the market had become stretched away and oversold from the norm… so a bounce ensued Thursday and Friday (don’t ask me how the DOW jumped 90 points in the last few minutes Friday). But for a strong day, volume was lighter than the day before… again showing me that the big money crowd is not buying this market feverishly. I pointed this out to you throughout the rally from March to May. I suspect with option’s week and the end of 6-month window dressing, a further bounce is a possibility… but it is important to continue to recognize that some of the things I have been telling you continue. The most important point to make is that the small caps are now outperforming the large caps in stark contrast to last year. I have seen nothing to change that stance.

I also want to continue to emphasize that the NASDAQ/NDX are also showing better relative strength but again, it is very narrow as only a few big leaders like Apple (AAPL), Reasearch in Motion (RIMM) and others mask a different story. In fact, the daily advance/decline for the NASDAQ remains amazingly at an all-time low… not just a yearly low. If 5-10 names top, look out for those indices.

Other notes:

One of the groups I have highlighted as bullish for many weeks has been the RAILS. They are now coming under distribution and need to be watched to see how they trade around 50-day moving averages.

STEEL, COAL, FERTILIZERS, OILS, METALS & MINING continue to lead but not much else. I do want to put the UTILITIES on your radar screen as names like Excelon (EXC), Entergy (ETR), Energen (EGN) and FirstEnergy (FE) look like they want to move out. This somewhat goofs me out as the BOND MARKET continues to crack… which simply means long rates go up - not good for the housing market.

Bottom line is that we had better see some heavy volume up days. Light volume up days and higher volume down days is not a good thing… and will only lead to lower prices. The best news I am seeing is that the NEW LOW LIST… while picking up in the short term, is way lower then where it was in March as the market approaches the March lows… a possible positive divergence. In any case, this game is not going to remain easy.

Lastly, a few important BROKERAGE names report this week. I believe Lehman Brothers (LEH) will have reported by the time you read this. I have a simple question. Why do these companies even report? Most of their numbers are from Fantasyland. Last quarter’s numbers out of Lehman were found out by a certain hedge fund manager to be nothing more than ca-ca. They have perfected the art of obfuscation in their numbers and for too long have been getting away with it. Lehman Brothers did not change their numbers of their own free will. They were found out. You all know who else is guilty.

I am heading for Pebble Beach for a couple of rounds of golf at the famed courses and then onto Hawaii for a needed rest. Of course, I am addicted to this game and will continue to report the psychotic moves in this market as they play out… only the reporting will be coming from a beach in Maui.

As for his Gary’s words on Tim Russert, we here at BMB feel the same way: he was, without a doubt, one of the best.

Futures lower, Empire State index weak, Lehman’s loss as expected, crude near record highs, dollar lower and gold and silver popping - could be interesting.