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.

A couple of potential listings for a future “Failure Friday” - over at Calculated Risk, here and here.

Maybe a little too hot.

From Chart Swing Trader:

There are currently around 130 stocks that have made a 50% or higher move in the last 20 trading days. Think about that for a second. That is crazy and unsustainable. A normal extended reading on this scan is between 20-30. I have seen the number get as high as 50 a few times. We are way beyond that right now. We are either in the process of a major bottom in the market, or we are setting up for a major pullback. If this was a major bottom, I think volume would be higher over the past week instead of dying off, and that there would be more IBD-quality stocks breaking out. There have been a few, but most of the movers have been the beaten down stocks.

Follow-up:   Jeff Saut doesn’t see this as a major bottom:

Is this the start of a new secular bull market? I doubt it because by our notes there have been 24 daily Dow Wows of 300+ points and none of them have been within the confines of a secular bull market. I continue to invest and trade accordingly.

We know that the US Fed and government ‘arranged’ the short-covering rally up in stocks off the July lows with their supposed ’save’ of Fannie and Freddie. We also know that ’said save’, if it were to take place when it takes place, is likely to be dollar negative.

Is there any reason to believe that the hedge fund short-covering moves in the currencies and commodities wasn’t ‘by arrangement’ as well? Um, not really.

James Turk offers up a little evidence - from last week:

So what happened to cause the dollar to rally over the past three weeks? In a word, intervention. Central banks have propped up the dollar, and here’s the proof.

When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly.

On July 16, 2008 (the closest date of the weekly reports to the July 15th low in the Dollar Index), the Federal Reserve reported holding $2,349 billion of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 billion, a 38.4% annual rate of growth. To put this phenomenally high growth rate into perspective, for the twelve months ending this past July 16th, assets in the Federal Reserve’s custody account grew by 17.3%, which is less than one-half the growth rate experienced over the past three weeks.

So central banks were accumulating dollars over the past three weeks at a rate far above what one would expect as a result of the US trade deficit. The logical conclusion is that they were intervening in currency markets. They were buying dollars for the purpose of propping it up, to keep the dollar from falling off the edge of the cliff and doing so ignited a short covering rally, which is not too difficult to do given the leverage employed in the markets these days by hedge funds and others. So central banks pushed in one direction and funds and traders then stepped on board. In other words, central banks ignited the fuse of a bear market rally.

Update:   Mish counters the intervention arguments.

	The Russell has retraced nearly all of its drop from the June highs.
	Somebody needs to tell the airlines that their planes won’t fly straight up.

Charts courtesy of StockCharts.com

Never a dull day in the markets - at least not these days.

Today started off quietly enough, but it didn’t stay that way. Another commodities meltdown began mid-morning, and got that stocks rocketing higher. But sometime after lunch, oil prices firmed up, reversed up off their lows, and that prompted stocks to reverse course as well. That quickly turned a 133 point Dow gain into a red number, with things recovering a bit in the final hour.

The Russell got the biggest bang, and was able to hang onto a big chunk of it into the close:

Treasuries moved lower, with yields moving higher:
6-month: 1.96%    2-yr: 2.55%    5-yr: 3.27%    10-yr: 4.00%    30-yr: 4.61%.

Internals were positive, and volume edged just above Friday’s levels. Advances/declines were 3 to 2 on the NYSE and 13 to 6 on the Nasdaq, with up/down volume 7 to 4 on the NYSE and 7 to 2 on the Nasdaq. And we finally got a day with more new highs than lows: highs/lows were 68/41 on the NYSE and 101/60 on the Nasdaq.

Mostly green in the groups again, with those bouncing bear-market areas leading the way for yet another day: retail (+4.8%), airlines (+3.9%), banks (+3.2%), homebuilders (+2.7%), REITs (+2.2%), and networking (+2.0%) - a lot of those numbers were much larger early in the day. And guess what? The commodity stocks were lower, led by gold and silver stocks (-5.4%), metals and mining (-5.0%) and steel (-3.8%).

Energy prices were mixed. Crude came off its lows to finish down less than a buck at $114.45/barrel. Gasoline dropped 2 cents to $2.87/gallon, but natural gas was higher, gaining 11 cents to $8.35/mmBTU. The dollar continued its move higher, pushing the dollar index up to 76.18. Panic has hit the precious metals markets - which seems a little odd to me. Gold got crushed, falling to $823/ounce and silver dropped hard as well, slipping to $14.65/ounce.

BMB Note:   Chaos reigns. Another wild and wooly day.

For now, the strong dynamic of ‘commodities down, stocks up’ remains in play. It could have ended today, it could end tomorrow, or it could still run for weeks or months. Who knows? But I’m still very curious to see how the market reacts when the commodities finally dig in their heels and stop falling, and we got a hint of that today when oil reversed up off the lows in the afternoon, and stocks quickly retreated.

Is today’s reversal off the highs important? I’m not sure it will mean anything real big, other than marking a short-term wall for the market to get over at this point. We’ll see if today’s ‘top’ turns into anything meaningful or not down the road - and I still think that is somewhat commodity dependent.

I do know this - typical of bear market rallies, stocks have gone pretty far, pretty fast, the worst groups have led the way up and are getting a little overbought here, while the commodities are very oversold. That raises the odds of some sort of reversal - even a temporary one - in the underlying dynamics, which could come at any time. And as I looked through my scans of stocks over the weekend, looking for pullback setups on either the long (or the short side), I saw virtually none. Zippo. That tells me that jumping in at this point is probably fairly risky.

Your mileage may vary.

As always, the bulls try to have things both ways. Or one way, really - everything is “good for stocks”, always.

While the dollar was sliding for years, all we heard was that a falling dollar was good for stocks. And that seemed to be the case, until October. Now that the dollar has finally put together a hasty rally up off the lows, what do we hear? That a rising dollar is good for stocks. Of course.

On the contrary - from Todd Harrison this morning:

…as Mr. Practical mused Friday on the Buzz & Banter:

A weak dollar propelled stocks up for six years. As the Fed inflated the money supply with debt, people took the debt and bought stuff.

Now the repo system is broken and the Fed cannot inflate the money supply.

In fact it is deflating.

As it deflates, debt denominated in dollars is destroyed.

As the debt is destroyed so is the dollar and it becomes dear.

So the strength we are seeing in the dollar lately is not good.

It is not from a strong economy in the US but a weak one.

Always check your premise and think “why” things are happening.

Yes, oil is down. But it is down because demand is falling rapidly and the dollar is now strong due to debt destruction and deflation.

Risk is growing exponentially now and Minyans need to be very careful.

In this case a strong dollar is very bad for stocks.

Gary Kaltbaum’s latest market views:

I am going to hold off on my weekly rants against the miscreants that are running our financial system into the ground because a lot is happening in the market. I will be back to my normal rants soon as I am sure we will continue to see imbecilic answers to the problems those same people created. This is what I wrote in my last report that I went out on July 30:

“Tuesday was a potentially very important day. The stock market followed through on a new rally as OIL PRICES again dropped precipitously. This bullish signal occurs after a major index hits a low and then experiences a big gain with volume higher than the day before. There is a direct correlation between OIL PRICES and the market since the market’s lows. Keep in mind… here is the line I say every time a follow through day occurs: Every bull move the market has ever had started with this characteristic but not every follow-through led to a new bull market. It is now time to build a watch list of leading stocks that have shown great relative strength during the bear phase and hopefully find them breaking out of bases on heavy volume. If none show up, this will tell you everything you need to know about the market. In past weeks, I have told you about the BIOTECH/MEDICAL/TRUCKERS but that has been about it for leadership. I will need to see more. The biggest moves on Tuesday were reserved for the areas that were hit the hardest and just trying to make up lost ground. Be patient… take your time because if this is for real, leadership will show up. You cannot hide bull markets just as you cannot hide the bear markets. The one thing I do at this point is to get off the short side… meaning any inverse ETF… whether market based or sector based. If this remains a bear market, I can always revisit. Keep in mind, the last follow through day in March lasted about 8 weeks and was very narrow with only a few COMMODITY-based areas leading. I suspect we will need to see the important OIL commodity continue to come in for the market to really get going. Lastly, please do realize that in the past 2 days, the DOW is up 20 points… S&P 4 points and NASDAQ 9 points. That is how spastic things have been. Do not believe for a second this is going to be easy.”

I start with that last paragraph because WE STILL REMAIN IN A CONFIRMED RALLY OFF THAT FOLLOW THROUGH DAY! This continues to give the market a chance to move higher as we have never seen a bull move of consequence without one. Since, I have actually started getting invested… the first time since late May. On top of the BIOTECH/MEDICAL and TRUCKERS, I am now seeing better action in RAILS and then a few names in the following groups… REITS - yes, REITS - as a few have moved out of bases and others setting up in bases, RESTAURANTS and RETAIL. I define leadership by stocks and sectors that had the best relative strength in the bear and their ability to move out when the action gets better. The rest of the market’s move has been all the bear market areas coming off their lows because of the continued drop in OIL. Usual suspects are AIRLINES, CRUISE LINES, HOUSING, RETAIL, TRANSPORTS and really anything CONSUMER as the market has completely flip-flopped. One of my best calls this year was the MAJOR SELL SIGNAL call I put out on the COMMODITIES on July 2. This is the reason for the better action in the consumer areas. Most COMMODITIES topped that day but not until OIL joined in on July 15th, did the market get going. OIL topped on July 15th… EVERYTHING ELSE BOTTOMED ON JULY 16TH. Oil topped… retail bottomed, direct correlation. Oil topped… restaurants bottomed, direct correlation. Oil topped… airlines bottomed, direct correlation… and so on and so forth. Near term moves aside… and there will be plenty of near-term moves, all COMMODITIES look sellable on bounces…and if they don’t put in real bottoms, MOST CONSUMER areas should be looked at on any anticipated pullbacks… thus the flip-flop. Now onto a few other points that need to be made.

Several weeks ago on TV, I stated that I thought the DOLLAR was trying to bottom. After a few days, I thought I was wrong. The move is now coming to fruition as the DOLLAR broke out nicely on Friday. I will let the pundits decide why. I have my own ideas. If this continues, expect COMMODITIES to continue to stay in trouble… and my previous bullish calls on GOLD to not work out… as GOLD has now broke below longer-term moving averages. GOLD had been basing nicely for the past 4 months.

I could not do a report without talking about the recent volatility. Very simply, there really isn’t precedent for me to study the ridiculous action of the past couple of weeks. The market has experienced 7 200-point up or down days with two 300-point up days… but in that time, the DOW is up a whopping 36 points. One cannot go home bullish or bearish and be comfortable for the next day.

I next needed to give you some stats that may or may not throw cold water on this nascent rally off the lows:

The 300-point rallies we have seen in the past week are actually normal for bear markets. Since the broad market topped in July, this was #7 and #8 for 300-point up days. During the last bear market, there were 16 300-point up days. But in the bull market that followed, there was ZERO… a big fat ZERO days where the market was up 300 points. HMMM!

It is quite normal to have intermediate term rallies in bear markets that last 2-3 months. The last one we saw lasted 2 months before the market was again trashed. Only this time, instead of narrow leadership in the COMMODITIES, this time the leadership is in most everything else while the COMMODITIES croak.

Every major market bottom has included several days of panicky action that tend to wash out the latest of late sellers. I am not so sure that has occurred yet.

So… before you get all lathered up, remember these facts as bull and bear markets do tend to rhyme as fear and greed play themselves out the same way. All that said, the market is in a confirmed rally now based on the continued plunge in OIL and other COMMODITIES. I believe that will absolutely need to continue for continued gains in the CONSUMER areas that are leading. I simply will continue to add to my positions if distribution does not rear its ugly head and leadership continues to show up. Be on the lookout for any massive distribution that could snuff out this rally. I am hopeful but I am also realistic. There is a lot of resistance ahead that this market has to deal with… and of course, a lot more news that could affect things.

A rather uninspiring beginning to the week, with the indices floating around the flat line. A/D lines are just in positive territory. The groups are split with airlines, retail and homebuilders leading, while metals, gold and silver, steel and chemicals are lagging.

Treasuries are just slightly lower, yields higher. Energy prices are just a bit higher. The dollar is fairly flat, with gold and silver slightly lower.

This article on Bear Stearns options trading just before it’s failure back in March makes the case that there was a concerted effort to bring the firm down. Whether that’s true or not, if the options transactions mentioned took place, then you have believe that somebody knew something - and quite a bit of ’something’:

Whoever placed the bet used so-called put options that gave purchasers the right to sell 5.7 million Bear Stearns shares for $30 each and 165,000 shares for $25 apiece just nine days later, data compiled by Bloomberg show. That was less than half the $62.97 closing price in New York Stock Exchange composite trading on March 11. The buyers were confident the stock would crash.

“Even if I were the most bearish man on earth, I can’t imagine buying puts 50 percent below the price with just over a week to expiration,” said Thomas Haugh, general partner of Chicago-based options trading firm PTI Securities & Futures LP. “It’s not even on the page of rational behavior, unless you know something.”