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.

Well, maybe not. Certainly they’re not leveling with us.

Barry’s got some interesting charts as to who’s still got what when it comes to those pesky ‘level 3′ assets, or as he describes them, “the difficult to trade/value/sell junk.”

His comment:

I cannot figure out why the SEC and FASB simply refuses to force firms to inform investors what is actually on their books. I guess they are particularly enamored of the Japanese model.

Lance Lewis with some observations on the recent wild action in gold and silver:

It’s probably going unnoticed by most, but even with spot gold plunging below $800 overnight, the gold shares indices (AMEX Gold Mines Index (GDM), AMEX Gold Bugs (HUI), etc) aren’t making new lows like the metal has. That’s a positive divergence. It also indicates that all of the leveraged guys have been blown out of the stocks at this point. The metal obviously still had some levered guys in it apparently, which may or may not be now finally cleaned out. Hence, gold traded the way it did last night as margin clerks effectively took over and the December futures actually traded at a momentary discount to spot due to the intense level of selling in the paper gold market. One thing is for sure though; any leverage that existed in the precious metals is going to be washed out completely as a result of this decline.

Meanwhile, the disparity between the physical market for gold and silver and the paper market in the futures continues to widen, as physical demand for gold and silver continues to explode. Many US dealers are apparently out of inventory, and pandemonium continues to break out overseas to buy the dip.

According to my sources, the drop in gold and silver prices has yet to show up to any great extent in the bullion coin market.

Peter Schiff tells foreigners how they really can decouple their economies from the troubles here in the US - stop lending us money:

The conventional wisdom is that foreign economies depend on Americans to buy their exports. This is false. The global expansion of the past decade has created new demand everywhere, and people and businesses in all corners of the world are spending. However, in America, spending has largely been achieved through a massive vendor financing scheme. Foreign supplied credit has allowed Americans to continue buying, even while American income and savings have dropped. As this credit goes bad, the losses are landing on the bottom lines of foreign financial firms. In other words, the global pain is not resulting from American contraction but from having financed our preceding expansion. This is a critical distinction few have been able to make, and it is vital to appreciating the decoupling that has already occurred beneath the surface.

The current losses that banks in Europe and Asia are now suffering are real, but future losses can be avoided by suspending future lending to Americans. Shutting off this credit will of course torpedo the dollar, but that is precisely what must occur. By allowing the dollar to drop to its natural, unsupported level, not only will the American caboose be decoupled from the global gravy train, but the rest of the cars will move along the tracks much faster. Absent the U.S., there will still be plenty of consumers to buy what is produced, and plenty of investment opportunities for those with savings. Rather than dragging the global economy down, such a development would actually un-tether it.

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Some foolishly believe that many of the world’s problems result from dollar weakness, and that pushing the dollar back up would be good for all. For example, since the weak dollar is contributing to the rise in oil prices, a stronger dollar should help bring prices down. However, if foreign governments weaken their own currencies to push the dollar up, they will simply succeed in bringing oil prices down for Americans. Oil prices will go up for their own citizens. This can’t be an attractive bargain for any European or Asian political leader.

The weak dollar is merely a manifestation of substantial structural problems underlying the American economy. Unfortunately for us, the solution to those problems, as well as the global economic imbalances, can only be found in a weaker dollar. Efforts to artificially prop the dollar up will only exacerbate those imbalances, and make its ultimate fall that much more severe.

Same old story. The market is still hailing the consumer and hating the commodities, and the indices are caught in the middle.

The leading Russell 2000 hit a wall at its June highs early in the morning and fell back, and was down a full percent in the late afternoon before finishing down a point. The Nasdaq, which opened up 20, also turned tail and finished down 1:

Treasuries were higher, and yields moved lower:
6-month: 1.93%    2-yr: 2.39%    5-yr: 3.10%    10-yr: 3.84%    30-yr: 4.46%.

Internals were mixed, and expiration day volume was higher than yesterday’s, but lighter than most of the other days this week. Advances/declines were just above flat on the NYSE and just below on the Nasdaq, with up/down volume 3 to 2 on the NYSE but just below the flat line on the Nasdaq. But the market did squeak out another day of more new highs than new lows, with highs/lows at 38/33 on the NYSE and 67/42 on the Nasdaq.

Some of those same old faces at the top of the groups list again today: airlines (+4.3%), homebuilders (+2.2%), retail (+1.9%), telecom (+1.5%), HMOs (+1.5%), banks (+1.5%), hospitals (+1.3%) and disk drives (+1.2%). And the same old faces on the losers list as well: gold and silver stocks (-3.7%), metals and mining (-2.4%), oil services (-2.3%), steel (-2.1%), oil stocks (-1.5%) and natural gas stocks (-1.2%).

In energy, crude prices fell to new lows intra-day but got a late bounce to finish down a buck-and-change at $113.77/barrel. Gasoline gave back a nickel to $2.86/gallon, and natural fell 7 cents to $8.09/mmBTU. The dollar index continued to climb, up to 77.18, and the PMs continued their slide, with spot gold falling to $787/ounce and silver, after failing to bounce much after getting slaughtered overnight, at $12.76/ounce.

BMB Note:   Nothing much new today, at least from the bit that I saw.

We’re starting to see a few hints that the move up in stocks might be getting a bit tired - a big divergence exists between the Nasdaq and NYSE Comp., the descent in crude has started to slow, the financials haven’t made any progress since the first week up off their lows, the two leading indices look like they hit a bit of a wall today and were turned back, put/call ratios are started to waffle a bit, etc. I don’t want to jump the gun and say this bear-market rally is done until it’s really started to break, and we’re not there yet. But I think we could be closer. Then again, maybe the next bull market has already begun and it’s just not obvious to me.

The market’s been playing on the same dynamics for quite a few weeks now. Financials started the big bounce, and as oil came down, the torch was passed to things like the airlines, homebuilders and retail. Commodities are obviously still a huge mess, and the dollar is overbought. If those things reverse and commodity prices start to bounce, stocks will probably start to struggle more than they have been. We’ll see how things play out - but since nothing lasts forever, I wouldn’t be surprised to see some sort of changes in the market dynamics in the relatively near term, like maybe in the couple of weeks. Just what happens and how we decide to react to it remain to be seen.

Expiration Friday started off with a pop, but that was quickly sold off, leaving the indices now dancing around the flat line, with A/D lines just in the red. You can probably guess the leaders and losers, because they’re the same as they’ve been almost every day for the past month: airlines, homebuilders and financials on the upside, and commodities - metals and energy - on the downside.

Treasuries are a little higher, yields lower. Energy prices are lower, the dollar index is higher, gold and silver are lower.

BMB will be out of the ‘office’ much of the day again today, but should be back by bar closing time. If the pattern of the last few Fridays holds, it might just be another snoozer, expiration or not.

Larry McMillan sees no sell signals yet - click here to view column with charts:

The broad stock market has been able to move higher, albeit in stuttering steps. There has been plenty of day-to-day volatility, with $SPX closing more than 15 points higher or lower on twelve of the last twenty trading days. Despite that, a clear uptrend exists on the $SPX chart (Figure 1) and the 20-day moving average is now rising as well. That moving average and the trend line connecting the three recent lows are at about the same place — 1270, basis $SPX. Thus, as long as $SPX remains above that line, the $SPX chart will be bullish. While the other indicators are also important, we would not be inclined to act upon sell signals — should any arise — while the $SPX chart is bullish.

The equity-only put-call ratios remain steadfastly bullish. They are continuing to decline on their charts. As long as they are declining, these charts are bullish. At the present time, they are only about mid- way down their charts, so there seems to plenty of room for the current market rally to continue, while these ratios work their way lower.

Market breadth has not been particularly strong. This is one of the reasons why we don’t think the bottom has been seen. If this rally were truly the end of the bear market, breadth should have expanded greatly, driving the oscillators deeply into overbought territory and keeping them there. But breadth didn’t expand much at all.

Volatility indices have bounced back and forth somewhat, but are generally working their way lower. A downtrend in $VIX is bullish, so this indicator is positive as well. Recently $VIX has been bounced back and forth between 20 and 22. A close above 22 would be somewhat negative in that it would interrupt the downtrend in $VIX, and it would also be a close above the declining 20-day moving average of $VIX.

In summary, we will remain long SPY and QQQQ positions as long as the uptrends are intact in those indices. The fact that most of the other indicators are positive is strong supporting evidence as well.

Deron Wagner has his eye on market volume:

The key ingredient missing from yesterday’s session was higher turnover. Total volume in the NYSE decreased by 16%, while volume in the Nasdaq came in 8% below the previous day’s level. Unfortunately, a lighter volume day of gains that follows a higher volume day of losses is exactly the opposite of what the bulls want to see. Furthermore, volume in both exchanges limped in at its lightest levels in weeks or more. If institutions remain more active on the “down” days than the “up” days, the stock market will eventually succumb to the selling pressure. This is because mutual funds, hedge funds, pension funds, and other institutions represent well over 50% of the market’s total volume on an average day. Detecting changes in the market’s volume patterns, in relation to prices, is one of the most reliable ways to know the true strength or weakness of a market. Recently, the overall price to volume relationship of the broad market has turned negative. This may contradict the modestly bullish bias of the market, but volume is typically a leading indicator of market direction, not a lagging one.

And today’s volume reading will be skewed by options expiration…