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 morning’s seemingly ‘good’ housing starts number is overshadowed by some screwy results.

Here’s how MarketWatch puts it:

It’s a good thing they like to build apartments in New York. That way, we get one positive headline out of the housing market this summer.

Much as we’d like to revel in the June housing-starts number — the Commerce Department on Thursday said it jumped 9.1% — the fact is that this increase was driven solely by a notoriously volatile category: multifamily construction. And this came solely from a rush of building in New York, where the onset of new construction rules skewed results.

What do the unskewed numbers show? A housing market that’s getting worse.

Single-family starts, a far better economic bellwether than multifamily activity, tumbled 5.3% to hit a 17-year low. Home builders’ confidence is at an all-time low: An index that measures traffic of prospective buyers through subdivisions plunged 25% this month, a tremendously negative indicator for future home sales and housing starts.

And, as always, we turn to Calculated Risk for the best charts in the business:

This graph compares single family housing starts (shifted 6 months into the future) with single family completions. This suggests that unless housing starts rebound quickly (like in ‘91), completions will probably fall to under 700 thousand by the end of 2008. This decline in completions will impact residential construction employment and suggests a further significant decline in residential investment.

So we’ve got this attempted rally/bounce going for a couple of days now. In my mind, here are the real questions

How long - and how far - will these groups be able to ‘carry’ the market…

…while these former market ‘leaders’ are clearly struggling?

And how long - and how far - will oil pull back?

Charts courtesy of StockCharts.com

Ok. So they did manage that 400+ point move in the Dow. It just took them two days to do it.

The oversold/short-covering/bear-market or whatever-else-you-want-to-call-it rally continued today, though after a rather shaky start. It took the bulls a while to get the push going, but they managed to do the trick, and ran up near the highs a couple of times in the afternoon.

Interestingly enough, the Dow outperformed the other indices for the day, while the NYSE Comp. and the Naz-100 lagged back - and it was another one of those days where the index numbers kept inching higher, even after the closing bell had rung:

Treasuries fell across the board, and yields moved higher:
6-month: 1.85%    2-yr: 2.55%    5-yr: 3.33%    10-yr: 4.04%    30-yr: 4.63%.

Internals remained positive, with volume slightly higher than yesterday’s levels as we move into expiration Friday. Advances/declines were 7 to 3 on the NYSE and 2 to 1 on the Nasdaq, with up/down volume 7 to 3 on both exchanges. Still more new lows than new highs, though, with highs/lows at 19/54 on the NYSE and 33/82 on the Nasdaq.

Yesterday’s big winners -airlines and financials - remained way out in front: banks (+10.0%), airlines (+9.4%), brokers (+6.6%), homebuilders (+6.3%), HMOs (+3.6%), retail (+3.5%) and semiconductors (+2.3%). Metals and energy got hammered again: steel stocks (-7.4%), metals and mining (-5.6%), gold and silver stocks (-2.0%), commodities (-1.9%), utilities (-1.6%), oil services (-1.0%).

A third straight day of lower energy prices. Crude dropped below $130 to $129.29. Gasoline lost 11 cents to $3.17/gallon (go fill up the reserve tanks!) and natural gas got pummeled after the morning’s inventory report, falling all the way to $10.54/mmBTU. The dollar index got a midday boost then fell back, but finished with a slight gain, up to 72.22. Gold and silver started the day higher but fell back, with spot gold slipping just a few bucks to $956/ounce but silver backing down 26 cents to $18.48/ounce.

BMB Note:   The worst areas of the market continued to launch off their lows today, and those former ‘leading’ areas got smacked around pretty hard again - as did energy prices for the third consecutive day (has anyone checked the PPT’s Nymex account lately??). Obviously the lower energy prices are a good thing for stocks, but I’m not so sure that the sudden movement from strong to horribly weak areas is a great idea. And you just never know how tomorrow’s options expiration fits into the equation either.

A bright spot in the commodity areas remains the precious metals themselves. The action there still looks fairly constructive, as gold and silver pull back to right around their recent breakout levels.

On to the stock market. To me, at least at this point, this move has all the characteristics of one of those ‘bear market rallies’ that Gary Kaltbaum has described for us in the past, and that Larry McMillan warned us could happen as this decline progressed. It has been very sharp, quick and noisy, and has been led by the worst, most heavily shorted bear market areas. Until proven otherwise, I have to stick with that premise.

We’ll be on the lookout for one of those IBD-type follow through days, but we’ll have to wait until at least tomorrow on the Nasdaq (day 4) and into next week for the other indices. If we get one, then we’ll have to respect the fact that the market has a chance to continue this move higher - and even that would be no guarantee. But if that were to occur, that would leave us with this sharp, V-shaped bottom. If the market is to put in a bottom that might have some staying power, I would prefer to see the lows from earlier in the week be retested over the next few weeks, and hold (of course). Then maybe I’d be more convinced.

As we said here yesterday - most downtrend lines remain intact, and the indices are just now getting a bounce up into their shorter-term moving averages, with the 50-day MAs still much farther above. Even after a couple of decent up days for the indices, there’s still a long way to go to turn this entire ship around.

Maybe we’re beginning that process. Then again, maybe this is just a temporary respite from the selling. I think it’s too early to know for sure.

After hours notes:
GOOG - closed at 533.44, trading around 477 now 497 490
MSFT - closed at 27.52, trading around 26.11 25.75
IBM - closed at 126.52, trading around 129.00 125.50

That’s about all we can do at this point is to see where the market is going to take us. As we said in yesterday’s wrap, follow-through is key.

Here’s Gary Kaltbaum on yesterday’s action:

The market had a strong day as beleaguered FINANCIALS, AIRLINE, RETAIL, TRUCKERS all romped. COMMODITY types were weak but off their lows. A few airlines were up 30-40% but that is all about stocks that went from 50 to 4… rallying up 2. REGIONAL BANKS were up 17% with big BANKS up 12% but again, they have been destroyed recently. BAC was up over 20% but that was after a 50% drop. Is this the low for these destroyed areas or a low? I will answer it the same way as when we have had any strong up day in the bear market… I dont know… but time will tell. We can only go by evidence of past bear markets and it is important to note that the one characteristic that always stands out in a bear market is that the rallies are sharp and quick. If you can get in perfectly, there is good money to make… but it had better be perfect because once the rally ends, look out below! Was today short covering? No doubt partially… and I gather that the SEC’s supposed “new” enforcement of short selling laws also may have had a play in it. I’ll also note that the SEC is only now announcing enforcement of laws that were already on the books.

Wednesday was day 2 for the NASDAQ as it was up yesterday but day 1 for everything else. Until the market has a follow through day, the best thing to do is to look for opportune shorts as things rally/bounce up into resistance. If the market has a follow through day, all bets are off on the short side.

If we have a follow through day which puts the market back into a confirmed rally, it is imperative to have a list of names that could possibly be played. Remember, the fact a that market has a follow through day only gives the market a chance for success, because while every bull market has had a follow through day, not every follow through day has turned into a bull market. That’s why you do not go full in. The best move is to probe and test; if you’re successful and things start to work, you add more. But that is jumping the gun. As of now, it is just one strong day… and I remind you, this is one of the main characteristics of bear markets - the biggest days the market ever had occurred during bear markets… so stay aware.

For your watch list:

Since OIL PRICES have come down, the TRUCKERS are already breaking out. I make note that they held tight even while OIL was moving up near $150. Names like ODFL, JBHT, WERN, ABFS. Other set ups are LSTR, CNW, KSU.

RETAIL has been trashed. But a few RETAILERS have not budged during the brutal bear. So…if the market gets legs, these names may lead. ROST, BKE, COST, TJX, FDO and BJ stand out… with BKE definitely interesting me.

If OIL continues down, one may want to look at Southwest Air (LUV) which has held up like a rock as LUV continues to make money in the worst of times.

HEALTHCARE continues to show strength. I have alerted you to these names before. Names like CELG, GILD, DNA, GENZ, VRTX, IMCL, MYGN, AMED, ALXN, BAX, ABT is a good starting list.

Unfortunately, after that, there is not much. There has been serious techincal damage done…so no matter what, this may take some time. I will continue to alert you especially if the market shows follow through.

In the recent past, I alerted to you how I thought that for the first time in months, COMMODITY stocks were topping. That is now coming to fruition as OILS, COAL, STEEL and others are now putting in awful topping patterns. Ultimately, this may be good for the market…especially the OILS. As I have said, nothing bad happens if OIL PRICES come down.

The news is going to be fluid. And as I have said for months, to anyone who tells you the end of the nausea out of these financial companies is near… I have some condos in Miami to sell to you.

Stocks rushed out of the gate, eager to add to yesterday’s gains and riding some early earnings reports. The Dow was up 100+ points in the blink of an eye - but it took less than 40 minutes for the first index, the Nasdaq, to reach all the way back below the flat line. And after a little more dancing around, that’s right where the indices find themselves - flat.

A/D lines are still green, but falling, and the groups are widely split: banks, builders, brokers, oil services, chemicals and gold and silver stocks lead the winners, while steels, metals and utilities lead the losers.

Treasuries are lower, yields higher. Energy prices are mixed, with crude and gasoline slightly higher but natural gas moving lower again. The dollar index is slightly lower, gold and silver are higher.

These days, “free” markets are apparently only a one-way street.

From The Big Picture:

This morning’s Ahead of the Tape column in the WSJ discusses the absurdity of targeting short-sellers during downturns.

“Some free markets are apparently freer than others: The price of oil is free to fall, while the stock price of a bank is free to rise.

That is one takeaway from Washington’s recent response to market turmoil. By singling out “speculators” who want to push bank stocks down and oil prices up, lawmakers and policy makers reinforce a message that the free market is a wonderful thing as long as it isn’t going against you.

It is a potentially slippery slope.”

Apparently, Free markets means free to go up only . . .

It isn’t just Jim Bunning. This Fannie & Freddy Fantasy produced by Hank and Ben’s Excellent Adventure has lawmakers from both sides of the aisle feeling a little queasy.

From Mish’s blog:

Bloomberg picked up the story in Lawmakers Balk at Paulson’s Fannie, Freddie Plan. Here are some interesting quotes.

Senate Banking Committee Chairman Christopher Dodd: “I’m uneasy about giving this blanket authority without having any kind of checks.”

Shelby: “I’ve never known Congress” to give “an open-ended blank check for somebody to fill in.”

Shelby again: “When you’re dealing with the taxpayer’s money I don’t think ambiguity has a place…We are potentially layering taxpayer resources on top of massive systemic risk.”

Democratic Senator Jon Tester of Montana: “It could be a trillion bucks” that Paulson could appropriate under his proposed authority.

Republican Senator Jim Bunning of Kentucky: “The taxpayers have reacted and the market has reacted to your plan by driving down Fannie Mae shares 26% today, right now…Freddie Mac’s are down 29% at this moment, just in case you are interested in how the markets are reacting to your wonderful plan.”

“Bernanke told lawmakers it’s ‘important’ for Fannie Mae and Freddie Mac bonds and stocks to rise…Paulson said the two companies are ‘essential’ because they represent the only “functioning” part of the home loan market.”

Check that out. Bernanke said it’s important for the stock market to rise (specifically Fannie Mae). How many mandates does the Fed have now?

Fed Mandates

• Price Stability
• Economic Growth
• Full Employment
• Rising Stock Market

So far you have to give Bernanke an “F” for all accounts.

So the bailout - that isn’t really necessary, as we’re being told by all those working feverishly to make it happen anyway - isn’t an easy sell. But according to this article at MarketWatch, foreign bondholders like the Japanese, are pretty much counting on it:

Japan’s private-sector financial institutions held slightly more than 10 trillion yen ($95 billion) in debt securities issued by U.S. mortgage lenders such as Fannie Mae and Freddie Mac as of the end of the fiscal year in March, according to a published report.

Both the government and the private sector have positioned the debt of U.S. mortgage firms as their core investment vehicles because of the entities’ high credit ratings and yields higher than those of Treasuries, the business daily Nikkei reported Thursday on its Website.

For now, Japanese financial institutions are not in a rush to unload them on the view that there is little risk of those products plunging in value, thanks to the effective guarantee by the U.S. government, Nikkei said.

My emphasis. But shouldn’t that say “the effective guarantee by the US taxpayer“??