When everybody turns bullish, bad things happen

There has been a rash of buying in the U.S. equity market, contrary to both my forecast and my hopes. Everybody seems to be turning bullish.

Two weeks ago I suggested that we take this year-end rally hype with a grain of salt. I said, don't get wrapped up in a short-covering exercise by nimble traders who know the power of Wall Street seeking year-end bonuses.

But the Dow is up +315 points in ten trading sessions.

That's too much, but it is what it is, which is to say a lot of short covering by the buy-side, and a lot of bull manure from the sell-side, as I see it anyway.

I have my doubts that this week's buyers are going to be happy as I still feel an intermediate term cycle low of 9200 (and certainly not less than 9800) will be seen within six months. Of course, I could be wrong; I have my doubts there as well.

One point I'd like to raise this week is about these amazing share buybacks by America's biggest companies. Who benefits really?

Altria (NYSE: MO) used to be a 3-billion share company. Now it's a 2-billion share company. One billion shares have been bought back with shareholder capital. That capital would have been better used to pay out dividends, which is a bird in the hand to the risk takers who own the shares.

It's done for the simple reason that the management/board of a company want to see an automatic increase in earnings per share, which is a baseline factor in determining their personal bonuses. Without owning much stock, they are the ones to get that bird in the hand.

The shareholders are left with the presumed increase in the share price based on higher earnings per share. But prices go up, and prices come down. So how does the shareholder benefit?

And another concern I have about these share buy backs is that they seldom occur at cycle bottoms, but usually at cycle tops. I have been watching this game for at least 30 years. Same old, same old.

Let's review what's new.

U.S. Equities: The Dow 30 Index is up to 10530, Nasdaq to 2169 and the S&P 500 to 1220.

It was just a couple days ago I figured 1210 on the S&P 500 was the cycle top. Today everybody seems madly bullish, so that's what's new!

My feelings are mixed. For the near-term, I can see the market being hyped for another rally. I mean, yes, it's possible, but it's still a question of where's the beef?

I see too many negatives, even if traders are ignoring them for now. And the equity market landscape is like a scatter map. Internally, the principles of sector rotation are not working, and there are too many price gaps occurring. Besides growing global inflation and rising interest rates do not set a table for a bull market feast.

I'm not getting that bullish feeling. Sorry.

The Dow 30 performance however is a different story. Last week, there were 18 stocks up and 11 down. The eight big winners out of 18 on the week were :

• HON ($35.90), up +6.85 pct: But lost -8.0 pct two weeks ago; may be looking for acquisitions
• MRK ($29.22), +6.10 pct: Also was up +5.2 pct a week ago; happened to win big in trial 2 of 6500
• CAT ($53.55), up +4.86 pct: Also was up +4.4 pct a week ago; will turn bearish after China slowdown
• WMT ($47.69), up +4.81 pct: Are you hearing the Street hype about "the new Wal-Mart"? Hmmm.
• AA ($25.17), +4.79 pct: Lower energy costs will zip profit; but still needs orders from auto plants
• MSFT (26.66), up +4.43 pct: Bevy of mass media "alerts" in effort to promote 2006 picture
• DIS ($24.81), up +4.16 pct: This one I like; could do $1.60 x 25 PE=$40 (support @ 23)
• PFE ($22.26), up +3.53 pct: Ok as well; technical bounce w/MRK, but could do $2.20 x 15 PE=$33

With WMT, MSFT and PFE included, I have to admit that list is pretty impressive, as were the Week over Week gains.

The seven big Dow losers out of 11 on the week (PG was flat) were :

• JNJ ($60.88), down -3.29 pct: Guidant woes, $700 mil break fee; but hit my buy-price @ 60 on Fri
• VZ ($30.90), down -2.52 pct: Telco hype seems over. The bears will now trot out the Cable story
• GM (26.77), down -1.80 pct: Monster debt and rising rates; how low can GM go?
• MMM ($75.13), down -1.46 pct: Solid company but too many undecided issues with new CEO
• MO (74.03), down -1.44 pct: Stock was distributed after the Supreme Court win on Oct-19
• KO ($42.30), down --1.24 pct: USD woes, but could do $2.25 x 25 PE=~50 in '06
• SBC ($23.66), down --0.96 pct: Same boat as VZ. Post-merger cost overruns and cable story ahead

As to the U.S. Sector ETFs: My positioning is as follows (20 pct invested; 80 pct cash) with the portfolio weighted as follows against the indexes:

• Energy: Over-weighted: lower PE's but growing value (XLE +2.7 pct W/W)
• Basic Materials: Over-weighted: lower raw material costs (XLB +1.4 pct W/W)
• Industrials: Minimally over-weighted: USD -1 pct W/W (XLI +1.5 pct W/W)
• Consumer Discretionary: Market-weighted: no money for durables, but XLY was +3.9 pct
• Consumer Staples: Market-weighted: defensive stocks in XLP will come in handy soon
• Healthcare: Market-weighted: also defensive, but IYH was up +2.0 pct W/W
• Financial: Under-weighted: trouble ahead with yield spread, rising yields, for XLF
• Technology: Under-weighted: premature bull move for SMH (+5.9 pct W/W)
• Telecom Services: Under-weighted: IYZ stocks are waiting to fight The Cable Guy
• Utilities: Under-weighted: XLU stocks have debt service worries (down -0.5 pct W/W)

U.S. Bonds: More losses this week, but small bounce aka a bull trap is possible here; higher yields are linked to higher mortgage rates, which in turn is causing the U.S. housing real estate market to top out

Commodities: Small pullback in the CRB Index last week, but prices are still high, means high raw material costs to producers, which have to be passed on to consumers, who then require higher wages; aka inflation

Oil & Gas: NY crude closed at 60.58 but has good support at 57-58 for the short-term

Gold Bullion: Continuing USD strength has held gold from breaking out above $500, but global inflation is economics problem number one, so gold will soon rally

Goldminers: I'm still buying dips, and looking to buy smaller caps, but any bullion trading below 450 (Dec-05 contracts) would be problematic

Forex: USD continues strong because foreign central bankers are playing the musical chair game regarding inflation, and they don't wish to raise rates like the Americans and Canadians. That tune will change.

To me, in addition to many bears turning to bulls, the big stories of the past week were:

1. Washington and Wall Street ignored Alan Greenspan, who has started his farewell tour, but still telling us about inflation and that the Fed will continue raising rates
2. Venezuela may be the fourth leading exporter of oil into the U.S., but the leader (Chavez) demonstrates yet again he is opposed to anything American (except their money)
3. XLE was up +2.6 pct last week and +4.9 pct a week ago. But last Friday, the price did come off -3.0 pct, and the USD surged Thursday and Friday
4. The trade-weighted USD index closed at 91.26, up +1.88 pct W/W but half the week was Friday, up +0.93 pct
5. The U.S. bond market is still very weak in the face of rising inflation. TLT was down again, this time by -1.66 pct W/W to 88.12. But there may be a bull trap ahead
6. $Gold was down -3.56 pct W/W to 456.66. A week ago, with $GOLD at 473.50, I wrote: "I am still nervous as to short-term direction. ... I'd like to see gold trade above 480 to set a new base for stepping into the 500's. But liking and hoping could be different from what happens..."

I will publish a more complete note for gold as the Metal Guru on the Gold Page at this website. There I explain that the TSX Goldminer index was indeed up last week, and the U.S. Goldbugs index was off moderately compared to the bullion, which was down sharply, so my outlook is not negative for the yellow metal.

Have a good week trading. But keep your eye on VIX (NYSE) and VXN (Nasdaq) as emotions are running high. Besides I think we've seen the bottom for these two indexes, which means too many traders are not factoring in the real capital market risks that exist today.

That's when bad things happen to the Bulls.