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.

Gary Kaltbaum had quite a bit to say on today’s radio show about Wall Street and our government’s efforts to talk down oil prices and prop up the financial stocks this week:

“…when all is said and done, if these people are able to make profits off the free markets but socialize the losses, we’re dead. We’re dead.”

You might want to give it a listen if you care about our supposed capitalistic society and free markets. Here’s a link to the MP3 file - Gary’s rant dissertation is right at the beginning of the show. On second thought, it was more of a rant.

From Carl Swenlin this week - this piece will likely be found in the weekend’s ChartWatchers newsletter:

In my July 3 article I warned that the market was oversold, dangerous, and vulnerable to a crash. On Tuesday of this week, the S&P 500 opened down, breaking significant support, and kept moving lower. I thought to myself, “This is it. Crash in progress.” Then subtle buying began, the decline was stopped in its tracks, and an advance began that lasted three days. My sense of the events was that the Crash Prevention Team had acted, but that is pure speculation about an urban myth. Certainly there were fundamental events later in the week that assisted the rally — the president’s lifting the executive prohibition of off-shore drilling, and oil prices dropping to $130 — but the price reversal during the first hour on Tuesday seemed magical to say the least.

—

Bottom Line: A crash was averted this week, and the potential for a new medium-term rally has developed. There are plenty of reasons to believe in this rally, but be advised that important short-term evidence has not yet materialized. If prices head back down for a retest, the danger meter will be redlined. If the rally does indeed continue, there will be wide-spread belief that the bear market is over. In my opinion, that conclusion will eventually be proved wrong. Participation in the rally, if it develops, should be managed on a short-term basis and on the assumption that it is only a bear market rally.

Yesterday, we were wondering if those that have been the worst areas of the market were going to be able to pull themselves together enough to provide leadership to this market, as it appears that the commodity areas are no longer in a position to do so.

At this point, it doesn’t look like the “Four Horsemen” are really up to the task either:

Strong dollar, you say? Hmm. Some of these foreign currencies are either at or near new highs, and the others look like they might be poised for another run at their highs. If they take off higher, that ’strong dollar’ jibberish we get from our government officials will become even more unbelievable…

Charts courtesy of StockCharts.com

That was just excruciating.

After a little bumping around in the first couple of hours - including an initial drop in the Nasdaq that was never recovered - pretty much the entire market went into ‘lockdown’ mode before lunchtime, and nothing was allowed to move after that point. It made for horrible viewing.

Here are the final numbers, with the Nasdaq getting a bit of a hit from last night’s tech earnings. I think the numbers are exactly the same as they were five or six hours ago:

Treasuries were lower, yields higher again:
6-month: 1.87%    2-yr: 2.66%    5-yr: 3.43%    10-yr: 4.09%    30-yr: 4.66%.

Internals were mixed. Amazingly enough, even with the typical expiration opening ‘pop’, volume was some of the lightest of the week. Advances/declines were 10 to 9 on the NYSE but 4 to 5 on the Nasdaq, with up/down volume 4 to 3 on the NYSE but 3 to 4 on the Nasdaq. New lows are still outpacing new highs: highs/lows were 15/50 on the NYSE and 28/68 on the Nasdaq.

The groups were split, with a few winners: oil services (+2.5%), airlines (+1.3%), oil stocks (+1.2%), telecoms (+1.2%) and transportation (+1.2%), and a few losers: computer tech (-2.0%), internet (-1.6%), metals and mining (-1.5%) and steel (-1.1%).

Energy prices, like stocks, didn’t move either. Crude lost a few cents to $128.88, gasoline was flat at $3.17/gallon and natural gas added just three cents to $10.57/mmBTU. The dollar index barely budged, sitting at 72.20. Gold fell only a dollar to $955/ounce, but silver got hit a little harder again, slipping to $18.13/ounce.

BMB Note:   Not much point in trying to ‘analyze’ today’s non-action. Let’s see what happens next week.

Have a good weekend - we’ll be here with the usual BMB weekend fare.

You know, the week or two leading up to expiration can be pretty wild and crazy - and then the actual expiration day comes, and it’s the most boring day of the month.

Wake me up when this is over.

Try not to rely on government’s attempted intervention in the marketplace for your source of ‘warm fuzzies’.

Here’s Andrew Jeffery on this week’s action in the financials:

It was a rally for the ages. In fact, according to Doug Kass, Tuesday’s 13% move in the financial services exchange traded fund, the XLF, was an 11-standard deviation event. Kass pointed out the odds of such an occurrence are roughly the same as the world ending - three or four times.

The last time we saw moves of this magnitude was nearly a year ago, just before the Fed “surprised” the markets by cutting the Discount Rate. Goldman Sachs (GS) CEO David Viniar said jittery markets experienced staggering gyrations — to the tune of 25 standard deviations — just days before Bernanke sought to calm them.

Such brazen manipulation shouldn’t inspire us to relax into the soothing embrace of the Plunge Protection Team. Rather, government intervention in financial markets is inherently destabilizing, as evidenced by the unprecedentedly rare events of a few days ago.

Financial market risk management is based on math, specifically on statistical models. Traders calculate the odds of an event happening, the potential loss if it does, and then invest accordingly.

Extremely rare events, sometimes called “tail events” (in reference to their position on the normal distribution), break those models and can cause huge losses. In fact, economic theorist Nassim Nicholas Taleb dedicated an entire book to Wall Street’s inability to cope with such highly improbable events, which he called “Black Swans.”

It used to be that most of these occurrences were caused by acts of nature, geopolitical shocks or long-term structural shifts in the way a certain market or group of peopled acted. Now, with alarming frequency, Washington creates these tail events under the guise of stabilization.

Nothing could be further from the truth.

As the market comes to rely on the Fed and the Treasury to heal its ills, traditional risk management is rendered useless. Investment banks are far better served by spending millions on crafty Washington lobbyists than on teams of expert statisticians and experienced traders to protect the firm’s capital.

Irrespective of one’s opinion on the economy or the stock market this isn’t a welcome development.

They’re well-capitalized, and everything is fine. Nothing to worry about.

But Freddie’s considering selling some shares to raise cash anyway. Probably just because it’s so easy in a market that’s as good as this one, right?

A bit of a mess this morning as some of the indices can’t get moving in either direction, but the Nasdaq and Naz-100 are lagging considerably behind the others. A/D lines are slightly in the red on both exchanges, and the groups are mixed: steels, oil services, metals, commodities, gold and silver stocks, natural gas and oils lead the winners, while computer tech, internet, semiconductors and insurance lead the losers.

Treasuries are fairly flat, with yields barely wiggling. Energy prices are a little higher. The dollar index is flat, with gold a bit higher, silver a little lower.

From The Big Picture this morning:

Pathetic, but all too true:

“Phil Gramm, the senator-banker who until recently advised John McCain’s campaign, did get it right about a “nation of whiners,” but he misidentified the faint-hearted. It’s not the people or even the politicians. It is Wall Street–the financial titans and big-money bankers, the most important investors and worldwide creditors who are scared witless by events. These folks are in full-flight panic and screaming for mercy from Washington. Their cries were answered by the massive federal bailout of Fannie Mae and Freddy Mac, the endangered mortgage companies.

When the monied interests whined, they made themselves heard by dumping the stocks of these two quasi-public private corporations, threatening to collapse the two financial firms like the investor “run” that wiped out Bear Stearns in March. The real distress of the banks and brokerages and major investors is that they cannot unload the rotten mortgage securities packaged by Fannie Mae and banks sold worldwide. Wall Street’s preferred solution: dump the bad paper on the rest of us, the unwitting American taxpayers.”  (emphasis added)

-William Greider, Wall Street’s Great Deflation

The once great Street of dreams has been reduced to beggering for handouts.   

Larry McMillan feels a lot like BMB does - he’s suspicious of this rally, and wants to see more proof (click here to view column with charts):

The long-awaited oversold rally is underway. Is it just that — a brief oversold rally — or is it something more lasting? We don’t know for sure at this point, but there is more work to do if it is more than just an oversold rally.

The $SPX chart is still bearish. The rally has pushed the index up towards resistance at 1270-1280 and towards its declining 20-day moving average (currently about 1275). That moving average is still declining, though, and so is the trend of $SPX prices. Thus, even if the rally were to get to 1270-1280, the $SPX chart would still be negative.

The equity-only put-call ratios have remained bearish, but as you can see from Figures 2 and 3, they have both curled over a bit. At this point, our computer analyses are still saying that these ratios are on sell signals, but it wouldn’t take much to turn them downward into buy signals. As a result, the next few days are crucial in that regard.

Market breadth reached near-record oversold levels in the last week, as day after day of selling swamped the market. Now, in just two days of upside action, that oversold condition has nearly been relieved. Another day of advancing issues outnumbering declines will likely generate buy signals from breadth. However, that isn’t quite confirmed yet.

At this time, the only confirmed buy signal is from the volatility indices ($VIX and $VXO). Both edged above 30 earlier in the week, and then reversed downward with a vengeance. That creates a short- term buy signal. If the upward trend of these indices is violated then that would be an intermediate-term buy signal. Specifically, if $VIX closes below 23, the trend of $VIX would be broken and that would be bullish.

In summary, we are suspicious of this rally, despite the buy signals from $VIX. It will be more important to see how the market handles the next decline, which should ensue soon. If that decline is modest and other indicators turn bullish, then we will consider adopting a more positive attitude toward this market. Even if this is another intermediate-term rally — much as we saw in February and April — we don’t think this bear market is over.