Bear Mountain Bull

More bouncing around, as stocks rallied into the afternoon out of an early pullback, pushing the indices to highs for the week. But the ‘prosperity’ was too much to handle, and a good portion of those gains slipped away in the final hour, only to be recovered in the last five minutes of the trading week. Crazy stuff.

The indices finished mostly green:

Treasuries were quiet, with little movement in yields:
6-month: 0.91%    2-yr: 1.56%    5-yr: 2.81%    10-yr: 3.97%    30-yr: 4.38%.

Internals finished positive, with volume picking up late (especially on the Nasdaq) to move above yesterday’s levels. Advances/declines were 14 to 5 on the NYSE and 3 to 1 on the Nasdaq, with up/down volume 3 to 1 on the NYSE and 3 to 2 on the Nasdaq. New highs/lows were 3/41 on the NYSE and 5/93 on the Nasdaq.

The groups were mostly green for another day, with some good sized gains seen again: airlines (+6.7%), REITs (+6.6%), brokers (+6.3%), homebuilders (+5.8%), transportation (+4.7%), retial (+4.2%) and banks (+4.0%). Gold and silver stocks (-4.4%) and utilities (-2.0%) led a short list of losers.

Energy prices surged mid-afternoon (for some unknown reason) and finished higher. Crude rose to $67.81/barrel, gasoline was higher by seven cents to $1.53/gallon, and natural gas jumped to $6.78/mmBTU. The dollar index bounced up to 85.66. Gold was lower, to $721/ounce, but silver was higher by a few cents at $9.81/ounce.

BMB Note:   Things are still pretty wide and loose, but the ‘wide’ is narrowing a bit, and for this week at least, the movement drifted to the upside. Right now, things look like they’re following our script fairly well, with things settling down but still holding up. Even some pullback from here, as long as volume remains light, wouldn’t do too much damage to the idea that a low – at least in the near-term – is in.

That’s encouraging, but doesn’t really embolden us to run out and load up on stocks. I’d like to see more convincing evidence that things are turning the corner for more than a few days. Of course, the longer we can go without serious distribution showing up, the better.

This is where that term ‘cautiously optimistic’ comes in handy, with an emphasis on ‘cautious’.

Calculated Risk has a nice chart showing how this market crash – and it has been a crash – compares with other market slides.

Things are somewhat quiet again this morning as the market tries to settle down a bit as it closes out a tumultuous October. The indices are straddling the flat line, with A/D lines just having returned to the green side, and groups split. Airlines, transportation, banks, retail, internet and REITs lead the winners, while HMOs, hospitals, steel, oil services and computer hardware drag behind.

Treasuries are mixed, but that 3-month yield is still trying to dig lower, now at 0.35%. Energy prices are near flat, the dollar index is higher, gold and silver a bit lower.

Some good quotes, via Calculated Risk:

A few quotes from David Streitfeld’s piece in the NY Times: Mortgage Plan May Aid Many and Irk Others

“Why am I being punished for having bought a house I could afford? I am beginning to think I would have rocks in my head if I keep paying my mortgage.”
Todd Lawrence, homeowner, outside Norwich, Conn.

“If the lunch truly is free, the demand for free lunches will be large.”
Paul McCulley, PIMCO

“If the government says, ‘Prove that you can’t afford your house and we’ll redo your mortgage,’ then people are going to try to qualify.”
Peter Schiff, President of Euro Pacific Capital

“I guess they are forcing me to deliberately stop paying to look worse than I am. Crazy, don’t you think?”
Anonymous Countrywide borrower, Los Angeles

Crazy indeed.

Larry McMillan takes a look at current market conditions and what his indicators are telling him – click here to view column with charts:

The October Seasonal bullish period has jump started a market rally that has at least lasted a few days. This seasonal bullishness expires this week, though, and then the market will be on its own again. Intermediate-term buy signals are in the process of being formed, but full confirmation is not yet in place.

We hit a virtual home run with our October Seasonal buy at the close of trading last Monday. That was the closing low for $SPX to date, near 850. A monster rally pushed $SPX quickly higher over the next two days, where it eventually ran into resistance at the declining 20-day moving average, near 970. This sort of action — while a welcome relief to the bulls — constitutes nothing more than an oversold rally in a bear market. Usually, these rallies carry slightly past the moving average, but have no real staying power. Rather, what is necessary for an intermediate-term buy signal on the $SPX chart is a pattern of higher highs and higher lows.

The equity-only put-call ratios are turning bullish. They are the first indicators to do so on an intermediate-term basis. The standard ratio (Figure 2) has actually formed a double buy signal, with the first one having been a bit premature. The weighted ratio (Figure 3), meanwhile, had blasted to new highs last seen in 2001. In the last couple of days, it has edged downward, and our computer analysis has called it a confirmed buy signal. Obviously, if either ratio should reverse and make new highs, that would negate these buy signals and return the indicators to a bearish status (much as happened with what appeared to be buy signals in late September).

Market breadth continues to improve this week, as there have been three straight days in which advances have led declines — one of which was a “90% up day.”

The volatility indices ($VIX and $VXO) made spike peaks with Tuesday’s strong rally. However, in this market, volatility spike peaks are nothing more than short-term buy signals. The more lasting, intermediate-term buy signal will occur when the trend of rising volatility is broken. At the current time, that would mean $VIX has to close below about 53 in order to violate the trend line in Figure 4.

In summary, the massive oversold condition is being worked off, and that has generated the current short-term rally. Intermediate-term buy signals are beginning to appear as well (equity-only put-call ratios and NYSE breadth). The most bullish scenario would be for the other indicators to turn bullish, and if there is then a move by $SPX above the highs of the current rally, then an intermediate-term buy signal will be at hand. However, any relapse prior to that, accompanied by a move to new lows, would negate the whole process and require that the base-building begin anew.

Not all stocks were resting comfortably today…

Chart courtesy of StockCharts.com

	Though the trading range is wide, it’s becoming more clearly defined in the Dow and S&P.
	The utilities are seeing some constructive action after getting trashed for a few months…
	…and the steel stocks have refused to go lower for a few weeks — not a huge consolation after a 75% drop from the highs.

Charts courtesy of StockCharts.com

Stocks continue to bounce around, but again, they spent most of the day bouncing on the green side of the fence, and rallied a bit into the close – unlike that heavy selloff in the last few minutes yesterday.

The Russell and the Utilities took the top spots today:

In Treasuries, yields were lower at the short end, but a bit higher on the long end:
6-month: 0.97%    2-yr: 1.58%    5-yr: 2.80%    10-yr: 3.94%    30-yr: 4.29%.

Internals were positive, though volume backed off again. Advances/declines were 4 to 1 on the NYSE and 3 to 1 on the Nasdaq, with up/down volume 5 to 1 on the NYSE and 3 to 1 on the Nasdaq. New highs/lows were 3/53 on the NYSE and 4/150 on the Nasdaq.

Nearly all of the the groups finished green, with quite a few big numbers: airlines (+10.6%), hospitals (+9.3%), oil services (+7.1%), natural gas stocks (+6.7%), gold and silver stocks (+5.9%), transportation (+5.2%), networking (+4.9%), disk drives (+4.5%), utilities (+4.3%), steel (+4.2%) and semiconductors (+4.0%).

Energy prices were lower. Crude dropped back to $65.96/barrel, gasoline lost the seven cents it gained yesterday, back to $1.46/gallon, and the new front month contract for natural gas fell to $6.43/mmBTU. The dollar index bounced back up after an overnight dive to finish just slightly lower at 84.55. Spot gold dropped back to $733/ounce, but silver lost only a few cents to $9.77/ounce.

BMB Note:   I wouldn’t say that the last couple of days of market action has me running head-over-heels to dive back into stocks, but it hasn’t made the picture look any worse either. As a matter of fact, today was looking a bit better than the indices were indicating late in the day, but even they came around by the closing bell. Advance/decline lines were solidly positive (and have stayed positive for two entire days now), and most of the groups were green as well, many posting decent gains.

Stock have yet to give back any of Tuesday’s big bounce up, but it’s only been a couple of days so far. We’ll keep our fingers crossed that things can hold up here for a while. The indices are back near the upper ends of their recent trading ranges, and the range of movement has contracted the past two days (but things are still bouncing around more than ‘normal’) – whether things will stay that way is another story. If this ‘quieting down’ can continue for a bit, maybe we can see a nice break up and out of the ranges with a little volume, and some sort of bear market rally can finally get underway. It don’t believe it would be a time to get wildly bullish, and there isn’t a lot to pick from when it comes to buying stocks, so I’m not sure how (or if) I’d play it at this point. But it would serve to calm things down somewhat and start to relieve the oversold pressure.

Commentary from Puru Saxena:

Let there be no mistake; the US has now transformed itself into a great socialist society by using taxpayers’ money to buy-out private companies. In my view, this ridiculous measure is a slap in the face of capitalism and will further promote reckless and dubious practices. Essentially, by bailing out the behemoths (Fannie Mae, Freddie Mac and AIG) and allowing the smaller fish (Lehman Brothers) to fail, the US establishment is sending out the following message:

“If you want government protection, please become too big to fail. If your demise threatens our entire financial system, we will help you. Otherwise, we will let you fail”!

There can be no doubt that this policy of ‘selective socialism’ is totally insane for several reasons. First and foremost, who has given these officials the power to decide which company is worth saving and which one is insignificant enough to fail? Next, what kind of message are they giving to the remaining banks – please merge quickly and grow in size or else you will be allowed to fail? Furthermore, America already has a horrendous debt problem (debt to GDP ratio in excess of 400%) so who has given the US Treasury the authority to take on more debt? Finally, who is going to pay for these trillions of dollars of bail-outs?

Although these bail-outs may offer short-term respite, I am of the opinion that the recent antics of the US establishment will make matters much worse over the medium to long-term. History has shown time and time again that no nation has ever printed its way to prosperity. In fact, all the nations which resorted to money-printing in the past, ultimately saw a total economic collapse. Furthermore, the middle-class and the impoverished people in those countries got totally wiped out due to runaway inflation. And apart from a handful of rich people who were able to ride the inflationary wave, everyone else suffered a great deal. I wish I could come up with more cheerful news but I am afraid the same economic outcome is likely in the US. If the clowns in Washington continue with their senseless inflation agenda by adding more monetary fuel to an already raging fire, I suspect we will see a massive deterioration in the American way of life.

But then, we knew that. It just sounds better coming from Marc Faber.

Finance Trends Matter has the link to the clip at Bloomberg.

Though the big-name indices have pulled back from their early highs and are now dancing just above the flat line, the Russell and the Transports are still holding decent gains, and A/D lines are still nicely green. There are more green groups than red ones as well, with the airlines, hospitals, transportation, networkers and computer hardware leading the way, while paper stocks, gold and silver stocks, HMOs, steel and oil stocks are at the end of the train.

Treasuries are fairly flat except at the short end, where that 3-month yield has dipped below a half-percent again. Energy prices are lower, the dollar index is bouncing up off overnight lows, gold and silver are lower.

Gary Kaltbaum with some questions and answers this morning:

Question 1: Do you think most of the credit crisis is over?

Kaltbaum: I actually think we may have. Longer term consequences aside, governments around the world have thrown anything and everything at the credit situation…and maybe the worst is over. Watch the market for clues. Longer term consequences? You have an hour?

Question 2: Do you think any more major banks will go under?

Kaltbaum: I am not sure. Longer term consequences aside, governments around the world have thrown anything and everything at these banks in order to keep them afloat. Watch the stocks for clues. Not until the market attacked names like Lehman, did they start to have a real problem.

Question 3: Do you think the lows could be in?

Kaltbaum: There is that chance. Sentiment indicators, which only matters at extremes, have been off the charts lately…culminating with a certain pundit (who missed most all of the bear market) calling for people to not be in the market for 5 years if need be. Talk of depression, bank failures, massive amounts of money pulled out of funds AFTER the drop…are all indicators of extreme sentiment. Technically, lows have now held and successfully retested for a couple of weeks. I am not sure a couple of weeks will tell the tale…but I make note that the worst areas that have melted down, have stopped going down…and are now on bounces. They need to keep going.

Question 4: What do you make of all this ridiculous volatility?

Kaltbaum: I don’t know. I must tell you that even though I have lost no money in this brutal bear market, the action makes me nervous on a daily basis. I find it is amazing that markets romped 700 points into the close on Tuesday…in the last 10 minutes of Wednesday, markets tanked 500 points…with 100 point rally after 4 pm. We then walk in this morning to a huge gap to the upside. Very simply, there isn’t any precedent to play this. The market itself is moving like a $4 thin trading Biotech stock with no sales. You must close your eyes, hold your nose and pray. On a bullish note, in the past, extreme volatility after a big move has sometimes called a turn.

Question 5: How do you play the constant gaps in the market?

Kaltbaum: I don’t!

Question 6: Is there any leadership in this market?

Kaltbaum: Very little. I define leadership not by a POT moving up $10 after it drops $180. I define leadership by finding stocks that held up best and reassert themselves quickly. I am seeing it in DISCOUNT RETAILERS and that is about it. Names like Dollar Tree…Ninety Nine Cents Stores…and Family Dollar are working fine…for obvious reasons.

Question 7: Are you amazed how deep the foreign markets bear market has gone?

Kaltbaum: Completely and utterly amazed. I am noticing big pops off the lows in past couple of days…so maybe a low is in…MAYBE! Of course, it is no great consolation that some of these markets dropped 70% from their highs…an amazing number!

Question 8: What do you think happens if Obama wins the presidency?

Kaltbaum: The chalk is Obama…but I have absolutely no clue what happens. I am not one who likes higher taxes. I am hoping moderate heads prevail…that’s if Obama does win.

Question 9: What do you think happens if McCain wins the presidency?

Kaltbaum: I would rather bet on the Mets bullpen!

A negative GDP number for the US, but the numbers for the Asian and European markets look pretty green, so the US futures are rockin’ toward the open as well.

…though you wouldn’t know it by watching crude prices the last few months. This isn’t news to those who have been following the peak oil discussions.

From FT Alphaville:

Output from the world’s oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows. Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, a draft of which has been obtained by the FT. Even with investment, the annual rate of output decline is 6.4 per cent.

The market sold off hard in the last 10 minutes of trading today. Trader Mike says it was “An apparently bogus report on GE’s 2009 outlook” that sent things into the weeds.

I have absolutely no idea whether that’s true or not.

Update:   Bespoke calls today’s market the Joke of the Day.

When we’re talking about ‘bounces’ and ‘turnaround’, we’re really only thinking short-term for now – maybe all we get is a temporary stabilization of prices. Looking past that, and hoping for a turn around of this weekly chart, is a pretty tall order. That’s going to take some time.

Chart courtesy of StockCharts.com

Well, I’m not sure what today would have been like had it not been a Fed day…

Things spent most of the morning puttering around, and then registering some gains before the Fed news came out. Even past that point, things were holding on fairly well until the last 10 minutes, when selling came in and took things down again.

But I’m not sure that much serious damage was done, especially with advance/declines lines staying well on the good side of zero.

The indices finished mixed:

In Treasuries, yields were lower across most of the curve:
6-month: 1.05%    2-yr: 1.52%    5-yr: 2.70%    10-yr: 3.84%    30-yr: 4.22%.

Internals were mixed, leaning to the positive side, and volume pulled back a bit from yesterday’s levels. Advances/declines were 5 to 3 on the NYSE and 11 to 8 on the Nasdaq, with up/down volume 10 to 9 on the NYSE but 4 to 5 on the Nasdaq. We’re still a long way from seeing many new highs, but new lows backed down: highs/lows were 4/81 on the NYSE and 1/198 on the Nasdaq.

The groups were split, with the beaten-down commodity areas leading the winning team: gold and silver stocks (+10.7%), metals and mining (+8.3%), oil services (+7.2%), natural gas stocks (+4.1%), homebuilders (+4.0%), biotechs (+3.4%), chemicals (+3.4%) and oil stocks (+3.3%). HMOs (-4.4%), airlines (-3.8%), banks (-3.6%), telecoms (-3.4%), utilities (-3.2%), REITs (-3.2%) and semiconductors (-2.8%) led the losers.

Energy prices moved higher. Crude gained nearly five bucks to $67.50, gasoline rose by seven cents to $1.53/gallon, and natural gas jumped back up to $6.48/mmBTU. The dollar index got smacked back down to 84.64. Gold gained only a few bucks to $750/ounce, but silver zoomed up to $9.81/ounce.

BMB Note:   I thought today was fairly constructive, even with that selling at the close. I’d rather see the Dow down a few points with positive advance/declines than the other way around.

What this market needs, after that big move up yesterday, is to spend some time sitting around, maybe even pulling back a bit on light volume. Hopefully the range of movement will start to contract, and then maybe we can get a few more constructive days to the upside to try to turn this thing around, at least in the near-term. I’m not setting my sights on anything long-term at this point. I’m really only looking for some sort of bounce that can last a few weeks to a couple of months, just to work off the deeply oversold conditions that exist. Once that’s done, we’d have to see what happens from there. But we have to get that process underway at some point, and maybe this is it.

Let’s see what the rest of the week brings.

Fed funds target rate cut 50 bps to 1 percent, discount rate cut by 50 bps as well, to 1 1/4 percent.

Here’s their statement.

I’m hearing and reading talk of a 75-100 bps cut by the Fed today – I was thinking more along the lines of 50 bps, which would put the FF target rate at an even 1 percent.

Any thoughts/guesses as to what we’ll hear at 2:15 ET?

The indices are still holding up and straddling the flat line after yesterday’s big bounce, with the morning action a little quiet ahead of this afternoon’s Fed announcement. A/D lines are positive, and the groups are split, with metals and energies leading the winners, while HMOs, REITs, banks and brokers trail the pack.

Treasuries are fairly flat. Energy prices are higher, still digesting the weekly inventory report just released. The dollar index is lower, gold and silver are higher.

Some thoughts from Todd Harrison this morning:

The A.D.D. immediate gratification “zero percent financing” lifestyle that was enjoyed by many and encouraged by most finally came full circle. The unwinding of societal abundance and attendant austerity will come to define this time with the benefit of historical hindsight.

There were certainly predatory lending practices in play from those who abused the system. Those actions were magnified by a grand experiment designed to suspend the business cycle and replace legitimate economic expansion with credit-fueled growth.

My grandfather used to say that what goes around comes around. The current crisis is the comeuppance of cumulative imbalances that have built since the turn of the century. The free market system forever changed and the ramifications will manifest for years to come.

While some see this as a nasty path, I’m viewing it through a constructive longer-term lens. Debt destruction and asset class deflation is a painful yet necessary progression that needs to occur before a stable economic recovery emerges. In order to get through this, we need to go through this and we’re going through it now.

In 2006, I shared that we would likely see a “prolonged period of socioeconomic malaise…entirely more depressing than a recession.”

While I don’t profess to know how long this process will persist, I’ll offer that with global indices down 40-50% year over year, the arbiter of time and price is moving in the right direction. That, on the margin, is a healthy evolution that will present profound opportunities for those who preserved capital.

—

If the U.S.A. is to regain respect on a global stage, there are intuitive steps than can be taken. Protect savers by backing deposits, hold individuals that over-extended on credit culpable for their largesse, investigate institutions that engineered the financial machination and punish policy makers that were compliant through acceptance.

We must establish a fresh international foothold, admit the error of our ways and begin to rebuild trust. From there, we should allow for a seismic readjustment that will bring currency, commodity, equity and credit markets back to the state of equilibrium from which we’ll together grow.

There are no easy answers for what ails the global financial landscape but a bit of humility and a dose of humanity would go a long way.

From Frank Barbera at Financial Sense tonight:

In today’s trading, the Japanese Yen plunged by nearly 4.35% and is now more then 6.5% off the recent high. More likely then not, the steep downside reversal in the Yen is a sign that for the time being, hedge fund carry trade unwinding has stabilized, likely with a lot of help from the Bank of Japan. Certainly, global stock markets sensed this move in the offing as over the last few days, a lot of positive divergences have appeared on the short term charts with foreign markets posting strong reversal sessions last night, and of course, the US market posting a monster gain in today’s session. A time out on carry trade unwinding is good news for equity markets, as it means a reduction/cessation in forced liquidation.

	Like the Dow, the S&P has been trying to hold the 10/10 lows and establish some sort of trading range here.
	But the Russell just bounced up off new lows set this morning, after dropping 42% in a little more than five weeks.
	The market is far from relaxed, with the VIX still up in the nosebleed section…
	…and that 3-month yield still well under one percent. Looks like the market may be prepped for a Fed rate cut tomorrow.

Charts courtesy of StockCharts.com

Wow. One thing we can say for certain – the volatility hasn’t left yet. Today, however, almost all of the wild and whacky movement took place on the positive side of the line.

Stocks started higher, getting help as global markets made strong moves overnight, but promptly gave back the early gains and by late morning, the indices were right back down at yesterday’s lows. But there things turned around, and an afternoon rally sent the indices back above yesterday’s highs, to the highest points they’ve been in days – and things really took off in the last 30 minutes or so, romping into the closing bell.

It took all morning, but the US markets finally gave in and decided to join the global bounce-back party. It may or may not be a game-changer, but for now, maybe it’ll be a bleeding-stopper. We’ll see. At least they bought things up in the last hour instead of selling them off hard like they did yesterday.

In Treasuries, yields fell on the short end, but moved higher on the long end:
6-month: 1.22%    2-yr: 1.59%    5-yr: 2.75%    10-yr: 3.85%    30-yr: 4.19%.

Internals recovered along with prices, finishing a healthy green, and on heavier volume. Advances/declines were 4 to 1 on the NYSE and 11 to 5 on the Nasdaq, with up/down volume 19 to 1 on the NYSE and 7 to 1 on the Nasdaq. New highs are still impossible to find, and we got a hefty dose of new lows today, despite the big: new highs/lows were 2/673 on the NYSE and 1/609 on the Nasdaq.

Big green numbers for many of the most beaten down groups – some shorts finally scrambling for cover, perhaps? The REITs (+17.4%) led the way, followed by steel stocks (+16.1%), metals (+14.5%), oil stocks (+13.7%), retail (+13.6%), banks (+13.0%), gold and silver stocks (+13.0%), airlines (+11.9%), defense (+11.8%), software (+11.1%), internet (+10.9%) and utilities (+10.6%).

Energy prices were mixed. Crude was lower at $62.73/barrel and gasoline dropped a couple of pennies to $1.46/gallon, but natural gas gained a few cents to $6.19/mmBTU. The dollar index bounced up, then back to near flat at 86.92. Gold gained 10 bucks to $745/ounce, but silver was flat at $9.06/ounce.

BMB Note:   You just never know what you’re going to get with this market.

At first glance, today looks great – a nice defense of the recent lows, a healthy reversal-of-the-morning-reversal-downward, and a pickup in volume from yesterday. Let’s hope it continues – and let’s hope things start to settle down and solidify a bit.

Follow-through will be key. No reason to get too excited about one day’s action, because this market has been notorious for smashing bullish hopes to smithereens. But in order to turn things around, even in the near-term, we have to see some up days, and that starts with one. Maybe this is that start.

Fed day tomorrow. That’s normally good for some bouncing around, but we’ve already been getting plenty of that without their help. Let’s just watch and see what happens. Keep those seat belts fastened – the ride hasn’t smoothed out much yet.

More bouncin’ around. After jumping up this morning, the indices swung right back down to yesterday’s lows, and now have bounced back up. Though at this point, with the indices up 2-3%, the advance/decline figures are fairly unimpressive, especially on the Nasdaq.