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.

Regular BMB readers are already quite aware that the biggest stock market rallies take place in the context of a bear market…

At The Big Picture, Barry goes over the details, showing that 300-plus point Dow rallies - like the one that happened yesterday - are confined to bear market territory. And he’s got the tables to prove it.

Merrill Lynch’s David Rosenberg was on CNBC this morning, discussing the current Bear Market. He noted that this was the sixth 300 point rally to occur since September 2007 (markets peaked the next month) — a period of time which can only be described as a Bear Market.

Even more intriguing, he observed that EVERY 300 point DJIA rally has occurred ONLY during bear markets. (Even the 1998 LTCM crisis saw two single-day gains of more than 300 points, September 8 and October 15, 1998. At its intra-day lows, 1998 had a 20% decline).

During the 2000 to  2002 bear market, the DJIA had 15 days where it gained more than 300 points. The first was March 15, 2000 (five days after the NASDAQ peaked) and the last was October 15, 2002, near the bottom of the bear market.

Hence, the odds are against making money chasing these 300+ point rallies.

During the 2002 to 2007 bull market, the DJIA had no days where it gained more than 300 points.

Update:   Also via TBP, Bespoke has some slight corrections to Rosenberg’s comments.

Them’s some big - with a ‘B’ - red numbers coming from AIG tonight.

From Bloomberg, with an assist from Calculated Risk:

American International Group … posted a $5.36 billion loss as writedowns tied to the housing slump wiped out profit for a third straight quarter. …

The insurer reduced the value of credit-default swaps, guarantees AIG sold to protect fixed-income investors, by $5.56 billion and marked down other holdings by $6.08 billion before taxes.

—

The biggest insurers in the U.S. and Bermuda posted more than $77 billion in writedowns linked to the collapse of the mortgage market from the start of 2007 through the first quarter, with AIG representing about half that total.

The Minyanville folks were, of course, all over Freddie’s earnings report and the Treasury’s ‘hiring’ of Morgan Stanley to babysit Freddie and his older sister Fannie.

There’s this from Jeff Macke:

Terry Woo, Minyanville editor, is asking me if the Treasury hiring Morgan Stanley (MS) to study exposure at Fannie (FNM) and Freddie (FRE) suggests that “The Treasury doesn’t know what’s going on.” Ahhh, Terry, you adorable, unjaded little forest creature of a man. Of course Treasury has no idea what’s going on. For that matter, did you see Morgan’s quarter? You don’t turn in those kind of results when you know what’s going on, son. The entire selling pitch of the products which caused this mess was making things so complicated that no one really had a clue. That way we could side-step answers to thorny questions like “how does adding up a bunch of lousy mortgages create a package of good mortgages?”

And you knew Mish would have something to say as well:

Treasury announced this week it had hired Morgan Stanley (MS) to help sort out the mess and assess the two companies’ financial positions.

It takes a very active imagination to think a company capitalized with just $37 billion to support more than $2 trillion in U.S. mortgage debt is anything resembling stable.

Although Fannie and Freddie managed to avoid buying the worst of the subprime mortgages originated during the housing boom, many equally toxic Alt-A and other non-prime loans made it onto their balance sheets. Even marginally savvy originators were able to exploit their automated underwriting and risk systems, resulting in the loss of billions of dollars from questionable loans.

Fannie and Freddie are now paying for their transgressions - or rather, the American taxpayer is paying, since Congress gave Treasury Secretary Hank Paulson what amounts to a blank check to bail out the two failed companies.

The only questions left are: When will Fannie and Freddie collapse, and what form will they take thereafter?

Trade your timeframe. The Nasdaq is trying to turn a short-term move into more of an intermediate term move, as it becomes the first of the ‘big 3′ to move above its recent highs and make contact with its declining 50-day moving average. But the next 150 points up could be a little tougher to manage as the COMPQ runs into much more resistance up at these levels. And for you Fib fans, the .618 retracement level is right around that 2400 mark.

Longer term, the downtrend off the October highs is still intact, matching up right now with the declining 200-day moving average.

Charts courtesy of StockCharts.com

While the Nasdaq led from the start, the other indices had a little trouble getting started, and tracked with oil prices for much of the morning. But an afternoon rally helped push the Dow and S&P up to test their recent highs before they were turned back again, and they almost lost their gains in the last hour before bouncing back into the close.

The Nasdaq rode the big-cap tech names to move above its recent highs:

Treasuries were slightly lower, yields edged higher:
6-month: 1.90%    2-yr: 2.57%    5-yr: 3.31%    10-yr: 4.04%    30-yr: 4.68%.

Internals were positive, with volume just shy of yesterday’s levels. Advances/declines were 8 to 7 on the NYSE and 3 to 2 on the Nasdaq, with up/down volume 7 to 5 on the NYSE and 7 to 3 on the Nasdaq. But you didn’t really expect that we’d get more new highs than lows, did you? Nope, didn’t happen. Highs/lows were 38/43 on the NYSE and 43/68 on the Nasdaq.

The groups saw a bounce back in the commodity stocks, as they led the green team for a change: gold and silver stocks (+3.7%), metals and mining (+2.4%), oil stocks (+2.6%), natgas stocks (+2.6%), oil services (+2.3%), software (+2.1%), steel (+1.9%) and networkers (+1.9%). Transportation stocks (-1.0%) led the losers.

Energy prices were mixed again. Crude fell just over 50 cents to $118.58/barrel and gasoline lost a penny to $2.95/gallon, but natural gas picked up another nickel to $8.77/mmBTU. The dollar index is challenging its highs of recent months at 74.25, while the precious metals try to bounce off their lows - spot gold was higher by five bucks to $879/ounce and silver got back nine cents to $16.53/ounce.

BMB Note:   Well, the Naz was able to break through to new relative highs, but the Dow and S&P are still fighting to get there.

This market has been floating on a cushion of falling oil prices, and sooner or later, that’s going to come to an end - and when that time comes, we’ll probably find out very quickly whether this market is for real or if it’s just an imposter. You probably know what my current opinion is on that question - up to this point, this move off the lows has done very little to convince me that it has a great deal of staying power, and we don’t see too many groups stepping forward as pockets of market leadership (but, of course, things could change).

That doesn’t mean we can’t continue to edge our way higher, and if we see a little more strength - e.g., a break and hold above recent highs in the indices - I may look to take a few trades on the long side to see how far they go - or I may not. We got up to that point on the Nasdaq today, but the other major indices still have a little more to go. Even if we do get to those levels - and in all likelihood we will, because that’s how these things tend to work - I’ll still be watching out of the corner of my eye for signs of a turn back down, which I believe is only a matter of time, and will be ready to roll back over to the short side if/when that time arrives.

And don’t be surprised if the market tries to fake everybody out to the upside first, before eventually rolling back over. We’ve got an early options expiration this month - coming up already next week. That could help to hold things up a bit at least through that point.

Sounds great, but can we do it?

High oil prices have brought about a push for electric cars, but could the power grid handle them? A topic for discussion over at Instapundit.

From Gary Kaltbaum, re: yesterday’s rally - via email to his partner filling in on his radio show last night:

“If this is the start of something important, leadership will show up and not just down-and-out stuff bouncing up. If it is another bear market rally, if you get in late on any bounce, you’ll be crushed.”

A bit of pullback from yesterday’s big gains, with the indices slightly in the red, along with the A/D lines. Banks, brokers, homebuilders, retail and transportation lead the slippage, while gold and silver stocks, metals, natural gas stocks, oils and oil services are getting a bit of a bounce back up.

Treasuries are lower, yields making a mini-spike up this morning. Energy prices are right around flat following the release of the weekly inventory data, which showed a build in crude and distillate supplies but a drawdown in gasoline. The dollar index is higher again, but gold and silver are higher as well.

Don’t worry Freddie. Go ahead, lose as much as you want - the government’s got your back.

Freddie Mac, the second-largest U.S. mortgage-finance company, posted a larger fourth-quarter loss than analysts estimated as delinquencies rose and cut its dividend to shore up capital.

The second-quarter net loss of $821 million, or $1.63 a share, compares with the 54-cent a share average loss estimate of nine analysts in a Bloomberg survey. The common-share dividend will be reduced to 5 cents from 25 cents, McLean, Virginia-based Freddie said today in a statement.

Give the execs a raise while you’re at it.