By Robert W. Colby, Senior Analyst TraderPlanet.com
Once Burned, Twice Shy? Investors Appear Reluctant to Jump Back In
According to all short-term oscillators, stocks became very oversold during the 12 trading-day downside shakeout that terminated on 8/1/07. These indicators were showing positive divergences by failing to confirm lower lows. Now, the oscillators have turned upward.
Recent huge downside volume indicated panic, selling climax conditions. Remember, for every share sold, there also had to be a share bought. When all the news seemed scary, SOMEBODY had to be buying. Since buying would have not been intuitively obvious to anyone watching the news, we might assume that stocks were bought by patient investors looking beyond the news of the day.
Spotlight on event stocks: Here is a stock screen I designed to pick out potential “event” stocks, both Bullish and Bearish. Sometimes, stocks with large changes in price and volume are revealed to be deal stocks, sooner or later, or are the subject of some other extraordinary events, positive or negative.
Bullish Stocks: Rising Price and Rising Volume
% Price Change, Symbol, Name
23.27% , CKFR , Checkfree Corp.
18.48% , BHH , Internet B2B H, BHH
0.60% , VCR , Consumer D. VIPERs, VCR
0.70% , XSD , Semiconductor SPDR, XSD
10.05% , IVGN , Invitrogen Corporation
1.09% , VBK , Growth SmallCap VIPERs, VBK
7.00% , HUM , HUMANA
4.96% , LVLT , LEVEL 3 COMMUNICATIONS
0.91% , VXF , Extended Mkt VIPERs, VXF
5.40% , EK , EASTMAN KODAK
3.52% , CVS , CVS
1.93% , PXQ , Networking, PXQ
0.84% , RFV , Value MidCap S&P 400, RFV
7.19% , ERTS , ELECTRONIC ARTS
5.20% , FLR , FLUOR
1.65% , VNQ , REIT VIPERs, VNQ
5.28% , LH , LAB CRP OF AMER
3.68% , NI , NISOURCE
0.86% , UTH , Utilities H, UTH
1.01% , JKK , Growth SmallCap iS M, JKK
1.99% , EWC , Canada Index, EWC
0.63% , FISV , FISERV
2.91% , ERIC.O , LM Ericsson Telephone Company
0.29% , RPV , Value S&P 500, RPV
4.56% , WYNN , Wynn Resorts L
3.50% , CA , COMPUTER ASSOC
4.68% , CAR , Avis Budget Group, Inc. (CAR)
2.10% , SNA , SNAP ON
4.58% , WPI , WATSON PHARM
2.51% , SUN , SUNOCO
1.67% , VIA.B , VIACOM STK B
2.48% , RX , IMS HEALTH
4.02% , RIMM , RESEARCH IN MOTION LTD
1.02% , PWO , OTC Dynamic PS, PWO
0.40% , PIC , Insurance, PIC
3.21% , HPQ , HEWLETT PACKARD
2.57% , PPL , PPL
1.12% , PUI , Utilities, PUI
0.96% , NCR , NCR
1.03% , PZJ , SmallCap PS Zacks, PZJ
1.92% , PTEN , Patterson-UTI Energy Inc
3.32% , NOVL , NOVELL
0.25% , CMS , CMS ENERGY
1.18% , PSJ , Software, PSJ
0.72% , AV , AVAYA
0.82% , LUV , SOUTHWEST AIRLS
2.68% , MAS , MASCO
2.50% , CSX , CSX
4.99% , ATVI , Activision Inc.
2.62% , DLX , DELUXE
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-7.29% , CLX , CLOROX
-8.28% , GTW , GATEWAY
-9.39% , MOLX , MOLEX
-3.47% , SEE , SEALED AIR
-7.99% , EDS , ELECTR DATA
-2.49% , AW , ALLIED WASTE IND
-1.81% , NYC , LargeCap Blend NYSE Composite iS, NYC
-3.94% , SANM , SANMINA
-4.57% , MRO , MARATHON OIL
-3.52% , IP , INTL PAPER
-2.94% , PLL , PALL
-0.80% , VDE , Energy VIPERs, VDE
-0.50% , EWI , Italy Index, EWI
-1.59% , AEE , AMEREN
-0.54% , D , DOMINION RSCS
-1.65% , CFC , COUNTRYWIDE FNCL
-1.58% , CNP , CENTERPNT ENERGY
-1.09% , MTB , M&T BANK
-2.72% , SSCC , Smurfit-Stone Container Corporation
-2.77% , SLB , SCHLUMBERGER
-1.20% , MNST , MONSTER WORLDWID
-3.31% , WM , WASHINGTON MUT
-1.74% , PX , PRAXAIR
-0.41% , CBE , COOPER INDS STK A
-0.92% , TMK , TORCHMARK
-1.31% , NTAP , NETWK APPLIANCE
-0.93% , ZMH , ZIMMER HLDGS
-1.12% , IGT , INTL GAME TECH
-1.19% , MHP , MCGRAW HILL
-0.55% , TAP , ADOLPH COORS STK B, TAP
-0.62% , BDX , BECTON DICKINSON
-0.14% , LQD , Bond, Corp, LQD
-0.29% , PCG , PG&E
-0.07% , EWP , Spain Index, EWP
-0.42% , FNM , FANNIE MAE
-0.03% , EWN , Netherlands Index, EWN
-0.46% , ITF , Japan LargeCap Blend TOPIX 150, ITF
-0.83% , PMTC.O , PARAMETRIC
-0.10% , HSP , HOSPIRA
-0.17% , HAS , HASBRO
-1.47% , AIV , APT INV MNGMT
-0.09% , CR , CRANE
-0.11% , IXG , Financials Global LargeCap Value, IXG
-0.08% , IAU , Gold COMEX iS, IAU
-0.58% , GLW , CORNING
-0.67% , ACV , Alberto-Culver Co.
-1.20% , HGSI , Human Genome Sciences Inc
-0.42% , SYMC , SYMANTEC
-0.05% , LAMR , Lamar Advertising Company
-0.03% , ZION , ZIONS
Sectors: among the 9 major U.S. sectors, 8 rose and 1 fell.
Major Sectors Ranked for the Day
% Price Change, Sector
1.27% Consumer Discretionary
0.90% Utilities
0.86% Health Care
0.68% Industrial
0.66% Financial
0.25% Materials
0.19% Technology
0.11% Consumer Staples
-0.68% Energy
Energy (XLE) Bullish. Price made a new high on 7/20/07 and relative strength made a new high on 7/23/07. XLE has been relatively strong compared to the S&P since 3/12/03. Overweight.
Materials (XLB) Bullish. Price made a new high on 7/19/07 and relative strength made a new high on 7/18/07. XLB has been relatively strong compared to the S&P since 9/27/00. Overweight.
Industrial (XLI) Bullish. Price made a new high on 7/19/07 and relative strength made a new high on 8/1/07. XLI has been relatively strong compared to the S&P since 8/9/06. Overweight.
Technology (XLK) Bullish. Price made a new 6-year high on 7/19/07 and relative strength made a new 19-month high on 7/26/07. XLK has been relatively strong compared to the S&P since its low on 7/24/06.
Utilities (XLU) Bearish. XLU has been relatively weak compared to the S&P since 4/2/07. Underweight.
Consumer Discretionary (XLY) Bearish. Price made a new 9-month intraday price low, and relative strength made a new 10-month low on 8/1/07. The sector and has been relatively weak compared to the S&P since 1/5/05. Underweight.
Consumer Staples (XLP) Bearish. Price hit a new 4-month closing price low on 7/31/07. Relative strength made a new 7-year low on 6/19/07. XLP has been relatively weak compared to the S&P since 10/9/02. Underweight.
Health Care (XLV) Bearish. XLV made a new 5-year relative strength low on 7/19/07 and has been relatively weak compared to the S&P since 10/9/02. Underweight.
Financial (XLF) Bearish. XLF made a new 11-month price low and relative strength made a new 5-year low on 7/31/07. Underweight.
Foreign stocks rose in price and outperformed since 7/26/07. The long-term trend is still Bullish: EFA (the EAFE, international developed country stock markets, ex the U.S. and Canada) has outperformed the S&P 500 since 3/19/03.
NASDAQ underperformed the S&P since 7/27/07. Appears uncertain short-term.
Growth sharply outperformed Value since 5/16/07. Longer term, the major trend of Growth/Value, mostly Bearish for seven years, could be turning.
Large Caps beat Small Caps since 4/19/06, and that trend in is motion.
Crude Oil prices are consolidating after making a new 10-month price high on 7/31/07. Longer term, the U.S. OIL FUND ETF (AMEX: USO) remains in its uptrend since its shakeout low at 42.56 on 1/18/07.
Energy stocks underperformed both SPY and USO. Long term, since 3/12/03, the stocks in the Energy Select Sector SPDR ETF (XLE) have significantly outperformed crude oil as a commodity, as well as the S&P 500. So, the Relative Strength major trend is Bullish for the energy stocks.
Gold underperformed the S&P since 7/31/07. Longer term, StreetTRACKS Gold Trust ETF (NYSE: GLD) has underperformed the S&P since the GLD top on 5/12/06.
Silver rose modestly but still has substantially underperformed Gold since 6/5/07. Longer term, iShares Silver Trust (AMEX: SLV) broke down to a new 6-month low on 6/26/07 and underperformed GLD since 12/7/06. So, the main trend is relatively Bearish.
The Gold Miners Index (XAU) underperformed Gold since 7/19/07. XAU also underperformed Gold since 1/31/06. In fact, Gold mining stocks have substantially underperformed the S&P 500 for more than 20 years.
Deflating: inflation expectations have been falling since 6/22/07. The ratio of the price of bond TIPS to 10-year U.S. Treasury Notes indicates declining inflation expectations.
U.S. Treasury Bond prices consolidated after making a new 11-week price high on 7/31/07. The shift from risk to safety might have outrun conditions, going too far too fast. The short-term bond price trend has been Bullish since the price low on 6/12/07. But since the peak at 97.66 on 6/16/03, the long-term trend appears Bearish for iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT).
U.S. dollar consolidated following its 3-day counter trend bounce from its 7/24/07 low to its 7/27/07 high. Longer term, the dollar fell to a new 15-year price low on 7/24/07, confirming the major trend as Bearish.
1.96% DOT
1.92% Brazil
1.50% Internet
1.38% Mexico
1.33% Taiwan
1.28% Sweden
1.27% Consumer Discretionary
1.20% REITs
1.20% Retailers
1.11% Nasdaq 100
1.10% Biotechs
1.05% Dow Utilities
1.04% Hospitals
1.00% Network
0.97% S&P Small Caps
0.94% Australia
0.93% Hardware
0.92% Computer Tech
0.90% Utilities
0.87% Nasdaq Composite
0.86% Health Care
0.83% S&P Mid Caps
0.81% Insurance
0.81% Australian Dollar
0.80% Health Care
0.80% Natural Gas
0.78% AMEX Composite
0.78% Russell 2000
0.77% Health Care Products
0.76% Dow Industrial
0.76% Airlines
0.76% Gold Mining
0.69% Dow Composite
0.68% Industrial
0.66% Financial
0.64% Value Line
0.52% Russell 3000
0.52% Canadian Dollar
0.50% Russell 1000
0.50% Wilshire 5000
0.48% NYSE Composite
0.44% S&P 500
0.44% United Kingdom
0.43% Drugs
0.39% S&P 100
0.36% Dow Transports
0.34% Banks
0.34% British Pound
0.25% Materials
0.24% France
0.20% Euro Index
0.19% Technology
0.17% 30Y T-Bond
0.14% Disk Drives
0.12% Germany
0.11% Consumer Staples
0.03% Austria
0.00% Singapore
-0.03% Netherlands
-0.07% Spain
-0.08% Switzerland
-0.10% Chemicals
-0.11% South Korea
-0.11% Swiss Franc
-0.15% Commodity Related
-0.16% Semiconductors
-0.17% Hong Kong
-0.21% Broker Dealers
-0.23% US Dollar Index
-0.44% Japanese Yen
-0.49% Belgium
-0.49% Japan
-0.50% Italy
-0.68% Energy
-0.68% Malaysia
-0.72% Oil
-1.05% Oil Services
-2.70% Paper
To sum up the current position of the U.S. stock market:
Looking beyond the recent short-term downside shakeout, longer term, the U.S. stock market has shown impressive Bullish resilience since the major low on 10/10/02, more than four years ago. Stock prices have been buoyed by abundant global liquidly (following years of fiscal stimulation, rapid money supply growth, and rising corporate profits), M&A, and earnings comparisons above expectations.
Liquidity driven merger and acquisitions news has been helping to keep the old Bull alive. Both U.S. and foreign corporations hold excess cash after several years of rising profits, and so M&A speculation as well as leveraged buyouts and corporate stock buybacks have provided substantial Bullish stimulus to stock prices. In 2007, mergers and acquisitions are running about 60% ahead of 2006’s record pace, driven by rising stock prices and private-equity funds that raised more than $250 billion for takeovers since the start of 2006. Takeovers are on track to surpass 2006’s all-time high of $3.49 trillion, according to data compiled by Bloomberg.
Conservative earnings estimates also have been useful in keeping the old Bull alive. First quarter 2007 corporate earnings reflected a significant growth slowdown. Nevertheless, earnings were ahead of expectations, which had been lowered to very conservative levels in advance of actual reporting. Managements and Wall Street have learned that investors hate disappointments, so they simply don’t give them any–unless absolutely necessary.
Investors might perceive anything that threatens to end abundant global liquidly, M&A, leveraged buyouts, corporate stock buybacks, and the net balance of positive earnings surprises as threats to the popular Bullish scenario.
Stocks generally are fully valued to over priced by long-term historical standards. Although that alone does not mean that stocks cannot continue to trend higher (as they have the great majority of the time since 2003) nevertheless, it is good to remember that “no tree grows to the sky.” The cyclical nature of stock prices never really changes, although the turning points are not always easy to predict.
