Bear Mountain Bull

Mr. Practical gives us a clear explanation of the inflation-deflation cycle - how we got where we are today, and even more importantly, where we’re going. Here’s the open and the close - I highly recommend you read the whole thing if you’re at all confused about what’s happening to our economic and financial systems:

Now that we’re getting a taste of what deflation is, it’s easier to talk about. Before, I tried to describe what to expect and how to deal with it, but in a way that was difficult for the average person to understand - especially when the government, the Fed, and Wall Street continue to misrepresent it.

Now that we’ve seen the beginning stages of deflation, it’s becoming clearer what’s going on and what’s important: to conserve capital. To save.

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For decades, but especially over the last seven years, central banks have “solved” any and all market dips, slowing economies, and financial problems by creating debt. If the stock market declines, just make it easy to borrow, so people can buy stocks. If the economy slows, just make it easy to borrow, so people can consume more. This methodology may work on occasion, but doing it systematically leads to crisis.

Central banks can’t fix this problem: They can only create more banking debt or transfer its risks onto taxpayers via TAF auctions or nationalization - which will only stabilize the banking system long enough for banks to dilute themselves massively by suckering investors into buying stock. More debt isn’t the solution.

So stay the course. Stay out of the way. Bottom feeders keep coming up empty. There will be rallies in stocks. Some will be quite vicious, but that doesn’t mean we’re in a bull market. The GDP’s going to go way down, but will eventually come back when debt is wiped out to a point where those with savings want to lend or invest again.

We have a long way to go, though - and risk is high.

The S&P 500 is the next of the major indices to test its March lows, sitting just a few points off those lows after registering a new closing low today.

Those hot coal stocks look to have topped in rather dramatic fashion:

And you can stick a fork in the steel stocks too:

Charts courtesy of StockCharts.com

Bounce? What bounce? Did you see a bounce? I must’ve blinked…

The hope for a bounce just turned into more ugliness today. The indices tried to fake it for a while, suffering from a morning dip, and then working their way back up to near the flat line early in the afternoon - but from there things just fell off the cliff. On top of that, some of the leading areas of the market were just completely destroyed.

Pretty ugly stuff, with the Transports getting smashed again:

Treasuries were slightly higher, but it wasn’t much of a ‘rally’ considering the weakness in stocks:
6-month: 2.04%    2-yr: 2.58%    5-yr: 3.30%    10-yr: 3.97%    30-yr: 4.51%.

Internals were clearly negative, but volume backed off slightly from yesterday’s levels. Advances/declines were 5 to 14 on both exchanges, with up/down volume 1 to 4 on each. New highs/lows were still pretty ugly, but new lows actually backed off a bit: highs/lows were 45/348 on the NYSE and 20/374 on the Nasdaq.

The groups were split much of the day, but only three were left in the green at the end: HMOs (+1.3%), disk drives (+0.4%) and drug stocks (+0.3%). But there were some pretty staggering numbers on the red side, where the metals - some of the leading stocks in the market - were ripped apart: steel stocks fell 13.0%, and metals and mining stocks were down 11.5%. And those weren’t the only sizable losses: airlines (-6.7%), homebuilders (-5.2%), transportation (-4.5%), commodities (-4.5%), oil services (-4.4%), chemicals (-4.2%), gold and silver stocks (-3.6%), oil stocks (-3.2%) and natural gas stocks (-2.8%).

Energy prices were mixed. Crude touched yet another new record above $144, finishing the day up almost three bucks at $143.57/barrel. Gasoline was also higher, at $3.55/gallon, but natural gas slipped 12 cents to $13.39/mmBTU. The dollar index fell back to its lowest level in weeks, at 72.04. The precious metals were higher - gold added five bucks to $944/ounce, while silver added a quarter to $18.34/ounce.

BMB Note:   Hmm. Even I thought we might be setting up a for a little bounce after yesterday. Nothing doing. But that’s why I don’t try to ‘guess’ what the market is going to do in my trading.

Today’s action is obviously not good news for the bulls. Probably the most disturbing development is the total destruction that took place in the steels, metals and coal stocks. Those are some of the last areas, along with the energies, that had still been holding up as the rest of the market tumbled. Today those metals and coals were totally shredded. So now they’re done too, at least for a time. I’m not sure there’s much left to turn to. Of course, if you’ve been careful, you’re not looking to go long here anyway, so no real harm done. But it doesn’t bode well for the overall market when the few leaders that remain are imploding.

Yes, we’re still massively oversold, and yes, we’re due for a bounce. But everybody and their mother has been waiting for it, calling for it, and some have even been trying to play it, even before it happens. I suppose it’s possible that we don’t even get one, and that we roll right down into some climactic move that puts in a near-term bottom.

I’ll stay where I am - on the short side of stocks, with the recent gains in the precious metals helping me out. It’s been working for a while now - and I’ll change when the market decides to. That ‘decision’ looks like it’s still TBD.

We’ve been sort of waiting to see if the day would come when the coals, steels, metals, etc. would finally give it up and crack wide open. Today looks like it could be that day.

Coals: PCX -15.7%, JRCC -12.8%, ACI -12.7%, MEE -12.0%
Steel: SCHN -13.5%, CLF -11.4%, AKS -8.7%, X -6.8%

A fairly quiet beginning to the day, as the indices are mixed around the flat line, except for the Transports, which are taking another hit. The NYSE A/D line is right at flat, while the Nasdaq’s is dragging in the red. The groups are split, with a few more green than red. Leading the winners are some of the beaten-down areas, like the banks, retailers and HMOs, with a few techs tossed in. Continuing to lose ground are the metals, steels and transportation. Also lower are the gold and silver stocks.

Treasuries are slightly higher, yields a bit lower. Energy prices are flat. The dollar index is lower after an overnight pop, gold and silver are slightly lower.

Deron Wagner’s assessment of the current market condition:

Even though we now anticipate a near-term rally in the broad market, it would be foolish to expect anything more than a tradeable, counter-trend bounce. There is an abundance of overhead supply, along with resistance of even the very short-term 10-day moving averages. If the major indices suddenly get their mojo back and start to move back above their 20-day exponential moving averages, we’ll re-assess the technical situation. But until then, we are viewing any new entries on the long side as strictly momentum-driven bounces that we are prepared to exit quickly.

Not a lot from what I can see - pretty much wrapped up in this little nugget from Minyanville. The Starbucks store closings, more rumblings on MSFT and YHOO, Blockbuster dropping their bid for CC, a warning from UNH.

The usual morning drivel…

US index futures are looking for a slightly higher open.

Update:   A weak ADP jobs report has brought the futures back down a bit, and sets us up for the gov’t jobs number tomorrow:

Private-sector firms in the U.S. lost 79,000 jobs in June, the biggest loss since November 2002, according to the ADP employment index, released Wednesday.

Employment in the services sector fell by 3,000, the first decline since November 2002.

Jobs in the goods-producing sector fell by 76,000, the 19th straight decline. Factory jobs fell by 44,000 and construction jobs dropped by 34,000. Employment in financial services fell by 3,000.

Job gains in May were revised lower to 25,000 from 40,000 earlier.