BEING STREET SMART
By Sy Harding
THE BULL/BEAR WAR RAGES ON! July 13, 2007.
Triple-digit one-day moves by the Dow have become frequent as the troops surge back and forth on the battlefield on Wall Street. One day, or one week, the bears seem to have the upper hand, only to be pushed back by the bulls the following day or following week.
As often happens in wars, the battles intensified once the seasons changed in May and warmer weather arrived. The bears were sure the change in seasonality would put them in control. The bulls were sure that this time is different.
The battle's statistics are interesting. There have now been 12 one day triple-digit moves since mid-May, or one on average of every 3.3 days. Six have been to the upside, and six to the downside. The triple-digit up days totaled 967 points. The triple-digit down days totaled 985 points. The largest move to the downside this year was 416 points on February 27. The largest move to the upside was 283 points on Thursday of this week. There have been strings of three or four days in a row in both directions. The 40 trading days since mid-May have also been evenly divided, with 21 up days and 19 down days.
There have been times when the battle seemed to favor the bears, with the Dow down 410 points from its May peak just two weeks ago, and times like now that favor the bulls. The bulls have come surging back with two weeks of rally that has the Dow 181 points, or 1.3%, above its May peak.
The attacks from both sides have been impressive. Take that, say the bears, throwing the worsening housing slump and slowing economy at the bulls, and the bulls fall back some in a triple-digit decline. Not so fast, say the bulls, coming back with a flurry of mergers and acquisitions that seem to bolster their enthusiasm and bring them back down the battlefield.
Then take this, say the bears, hurling the sub-prime mortgage problems and resulting threat of the failure of Bear Stearns hedge funds at the bulls. It staggers the bulls, another triple-digit blow.
But the bulls sneak back in a nighttime attack. Hah, they say, we'll cover that problem up by loaning more money to the Bear Stearns funds to save them. And that bear attack fizzles out.
However, the bears are able to come right back with an even larger attack, the news that the rating agencies are finally downgrading mortgage-backed securities to reflect the soaring mortgage default rates. The bears are sure that will force hedge funds and other bullish owners of leveraged debt to reveal their large losses. And that wreckage will tumble onto the bullish banks and brokerage houses that made the big loans to hedge funds that financed their leveraged positions.
The bulls come back, saying, No, No, No. We will divert attention away from that problem by focusing on upcoming 2nd quarter earnings which should be good. And they gain ground, with a triple-digit up day.
The bears immediately struck back on Tuesday of this week with the news that the 2nd quarter earnings reporting period was off to a poor start. The first of the major firms reporting, Alcoa, Sears Holdings, and Home Depot all warned their earnings were not going to meet forecasts. And sure enough the bulls staggered backward on Tuesday with a triple-digit decline, accompanied by the bears yelling down the field that the mounting problems can no longer be covered up. It looked like the final blow to the bulls. Meanwhile, the bears have been so sure of winning that short-selling, a bet on the market's downside risk, reached record levels.
On Wednesday, the bears couldn't believe their eyes when the bulls came roaring back up the battle field, rallying around news that U.K. mining company Rio Tinto was acquiring Canadian aluminum producer Alcan for $38 billion, and WalMart earnings had beaten estimates. Their rallying cry was that U.S. investors should be emboldened by that news. It was a sign, they yelled, that worries over consumer spending slowing were a non-issue. And sure enough the market roared back to life, the Dow gaining 76 points on Wednesday, and a whopping 283 points on Thursday.
Observers said much of the buying on Thursday was created by those short-selling bears being forced to the buy side to close out their positions as the rally progressed during the day.
But the bears weren't capitulating. On Friday they launched another attack with news that the bulls were also wrong about consumer spending. The much anticipated retail sales report came out Friday, and revealed that retail sales fell a big 0.9% in June. It was the biggest drop in 2 years, and much worse than Wall Street had forecast. But the bulls had some momentum from Thursday and advanced a bit more, although on very low volume, battle weary participants on both sides standing back from the combat.
Fortunately for both sides, the war recesses on weekends so both sides can rest up and plan their next move. Next week the battle will resume with the eventual winner still in doubt.
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