By Robert W. Colby, Senior Analyst TraderPlanet.com
In 3 days, stocks recovered most of their sharp 15 trading-day losses.
A typical short-covering rally.
Foreign stocks led the way up as the U.S. dollar fell.
Consumer Discretionary sector relative strength made a new 11-month low.
Bond prices reversed to the downside as credit crisis SEEMINGLY passed. (But has it really?)
Some sentiment indicators have gone to Bearish extremes, which is Bullish according to the Art of Contrary Opinion.
On 8/7/07, the ISEE Call/Put Ratio fell to a record low level of 0.51, indicating that nearly twice as many customers opened long put options than opened long call options. This 0.51 level is 3 standard deviations below the one-year mean, now at 1.27.
Last week, the CBOE Equity Volume and Put/Call Ratio was more than 2 standard deviations above its one-year mean.
There was a big drop in Bullishness, according to the weekly Investors Intelligence newsletter survey: the ratio of Bullish advisors to Bearish advisors plunged to 1.39 to 1 as of 8/8/07. This was way down from 2.99 to 1 just two weeks ago, which was the highest in nearly two years.
Stocks became very oversold during the 15 trading-day downside shakeout. RSI and Stochastics price momentum oscillators hit their most Bearish extreme lows on 7/27/07 and have been showing positive divergences since then by failing to confirm lower lows in price. As of Wednesday’s close, both oscillators and price indexes were rising strongly—but this pace is too fast to last.
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
24.31% , PWER , POWER ONE
1.29% , MKH , Market 2000 H, MKH
2.53% , DSG , Growth Small Cap DJ, DSG
2.95% , PXN , Nanotech Lux, PXN
11.08% , VC , VISTEON
6.65% , PBW , WilderHill Clean Energy PS, PBW
2.28% , IXN , Technology Global, IXN
2.45% , PXQ , Networking, PXQ
17.39% , MTG , MGIC INVESTMENT
1.10% , VIG , Dividend Appreciation Vipers, VIG
11.50% , HGSI , Human Genome Sciences Inc
3.87% , IIH , Internet Infrastructure H, IIH
0.92% , PHW , Hardware & Electronics, PHW
6.87% , F , FORD MOTOR
6.70% , CSCO , CISCO SYSTEMS
0.87% , VIS , Industrials VIPERs, VIS
2.11% , VXF , Extended Mkt VIPERs, VXF
2.37% , IGE , Natural Resource iS GS, IGE
9.83% , BRCM , BROADCOM STK A
3.22% , JKK , Growth SmallCap iS M, JKK
2.37% , EZU , EMU Europe Index, EZU
1.32% , RSP , LargeCap Blend S&P=Weight R, RSP
1.43% , JKJ , SmallCap Core iS M, JKJ
4.95% , BEAS , BEA Systems Inc
11.40% , GTW , GATEWAY
1.14% , ELV , Value Large Cap DJ, ELV
10.77% , CIT , CIT GROUP
6.52% , GT , GOODYEAR TIRE
0.49% , PMR , Retail, PMR
0.99% , RZG , Growth SmallCap S&P 600, RZG
1.50% , PBE , Biotech & Genome, PBE
0.75% , JKG , MidCap Blend Core iS M, JKG
1.80% , ONEQ , Growth LargeCap NASDAQ Fidelity, ONEQ
2.19% , VDE , Energy VIPERs, VDE
4.58% , PRU , PRUDENTIAL FINL
0.91% , KLD , LargeCap Blend Socially Responsible iS, KLD
1.87% , DGT , Global Titans, DGT
6.90% , DHI , D.R. HORTON, DHI
3.63% , PHO , Water Resources, PHO
4.84% , WFMI , Whole Foods Market Inc
1.29% , TMW , Wilshire 5000 ST TM, TMW
1.48% , JKH , MidCap Growth iS M, JKH
0.88% , PWJ , Growth Mid Cap Dynamic PS, PWJ
6.81% , SPG , SIMON PROP GRP
7.36% , JBL , JABIL CIRCUIT
4.15% , EK , EASTMAN KODAK
8.16% , CTX , CENTEX
1.21% , RFG , Growth MidCap S&P 400, RFG
6.78% , RHT , Red Hat Inc.
6.06% , CIEN.O , CIENA
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-10.25% , LAMR , Lamar Advertising Company
-7.55% , DLX , DELUXE
-7.34% , RFMD , RF Micro Devices Inc
-0.34% , RZV , Value SmallCap S&P 600, RZV
-10.24% , TUP , TUPPERWARE
-4.69% , RTN , RAYTHEON
-3.73% , AM , AMER GREETINGS STK A
-5.98% , CTL , CENTURYTEL
-5.33% , WPI , WATSON PHARM
-3.07% , ACV , Alberto-Culver Co.
-3.65% , LMT , LOCKHEED MARTIN
-3.15% , LNCR , Lincare Holdings Inc
-5.45% , KG , KING PHARM
-2.62% , AW , ALLIED WASTE IND
-5.61% , CVG , CONVERGYS
-4.20% , HUM , HUMANA
-1.22% , TLT , Bond, 20+ Years Treasury, TLT
-3.05% , KR , KROGER
-4.68% , COH , COACH
-5.15% , ASH , ASHLAND
-3.05% , MYL , MYLAN LABS
-2.75% , TNB , THOMAS & BETTS
-2.30% , CECO , CAREER EDUCATION CORP
-1.83% , UIS , UNISYS
-4.38% , CMI , CUMMINS
-4.09% , TYC , TYCO INTL
-2.71% , CHKP , Check Point Software Technologies Ltd
-2.22% , AET , AETNA
-4.43% , TAP , ADOLPH COORS STK B, TAP
-1.49% , PPG , PPG INDUSTRIES
-1.54% , STI , SUNTRUST BANKS
-3.29% , APOL , APOLLO GROUP
-3.48% , EMN , EASTMAN CHEM
-8.30% , CTB , COOPER TIRE
-5.23% , MDP , MEREDITH
-1.72% , CB , CHUBB
-1.49% , SGP , SCHERING PLOUGH
-0.42% , PWC , LargeCap Blend Dynamic PS, PWC
-1.01% , GAS , NICOR
-2.28% , CEPH , Cephalon Inc
-0.82% , TXN , TEXAS INSTRUMENT
-2.23% , S , SPRINT NEXTEL
-2.93% , UNM , UNUMPROVIDENT
-1.51% , SSCC , Smurfit-Stone Container Corporation
-2.25% , CI , CIGNA
-2.57% , DRI , DARDEN REST
-0.17% , PEJ , Leisure & Entertainment, PEJ
-1.91% , OMC , OMNICOM
-1.29% , PETM , PETsMART Inc
-0.62% , CMCSA , COMCAST HOLDINGS STK A
Sectors: among the 9 major U.S. sectors, all 9 rose.
Major Sectors Ranked for the Day
% Price Change, Sector
2.94% Materials
2.42% Financial
1.90% Energy
1.76% Consumer Staples
1.55% Technology
1.46% Utilities
1.16% Health Care
1.13% Consumer Discretionary
0.78% Industrial
Looking beyond the daily fluctuation to the major trends (listed in order of relative strength):
Industrial (XLI) Bullish. Consolidating in recent days. Relative strength made a new high on 8/3/07. XLI has been relatively strong compared to the S&P since 8/9/06. Overweight.
Energy (XLE) Bullish. Relative strength outperformed for the day after suffering a short-term downward correction since its peak on 7/25/07. Longer term, XLE is still in an uptrend compared to the S&P since 3/12/03. Overweight.
Technology (XLK) Bullish. XLK appears to be consolidating since the price peak on 7/19/07. Longer term, XLK has been relatively strong compared to the S&P since its low on 7/24/06. Overweight.
Materials (XLB) Bullish. Relative strength suffered a short-term downward correction since its peak on 7/18/07. But longer term, XLB has been relatively strong compared to the S&P since 9/27/00. Overweight.
Consumer Staples (XLP) Improving. Price rose to the July high. Relative strength made a new 3-month high on 8/6/07. XLP has been relatively weak compared to the S&P since 10/9/02. Market weight.
Utilities (XLU) Improving. Relative strength has been rising since 7/30/07. Market weight.
Health Care (XLV) Bearish. Relative strength made a new 5-year low on 7/19/07, confirming a major downtrend. Underweight.
Consumer Discretionary (XLY) Bearish. Price made a new 9-month low on 8/6/07. Relative strength made a new 11-month low on 8/2/07. Underweight.
Financial (XLF) Bearish. 3-day oversold bounce probably not sustainable. Price fell to a new 12-month low on 8/6/07, confirming a major downtrend. Relative strength made a new 6-year low on 8/3/07. Major trends are down. Underweight.
Foreign stocks outperformed for the day and 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 outperformed for the day. But NASDAQ has underperformed the S&P since 7/27/07. It outperformed since 5/17/07. Appears uncertain–at best.
Growth sharply outperformed Value since 5/16/07. Longer term, the major trend of Growth/Value, mostly Bearish for seven years, appears to have turned Bullish.
Large Caps beat Small Caps since 4/19/06, and that trend in is motion. Relative Strength of Large/Small Caps made a new 2-year high on 8/6/07.
Crude Oil prices look corrective for the short-term. But the longer-term trend is Bullish. Crude made a new 10-month price high on 7/31/07. 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 outperformed both USO and SPY. 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 rose only slightly, underperforming the SPY. Last week, Gold benefited from the flight to safety, but that trend might be temporary. Longer term, StreetTRACKS Gold Trust ETF (NYSE: GLD) has underperformed the S&P since the GLD top on 5/12/06.
Silver 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) outperformed Gold for the day but underperformed since 7/19/07. XAU also underperformed Gold since 1/31/06. In fact, Gold mining stocks have substantially underperformed both Gold and the S&P 500 for more than 20 years.
Deflating: inflation expectations recovered fractionally after plunging steeply to new 2-month low on 8/6/07. The ratio of the price of bond TIPS to 10-year U.S. Treasury Notes has been falling since 6/22/07, indicating declining inflation expectations.
U.S. Treasury Bond prices fell sharply on high volume. Last week’s shift from risk to safety appears to be unwinding for the short-term. Since the price 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 reversed to the downside. It could be heading for another test of the lows. Longer term, the dollar fell to a new 15-year price low on 7/24/07, confirming the major trend as Bearish.
Daily Rankings of Major Global Markets, Ranked from Strongest to Weakest of the Day:
4.96% Singapore
4.04% REITs
3.39% Taiwan
3.38% Brazil
3.32% Airlines
2.94% Materials
2.86% Gold Mining
2.83% Broker Dealers
2.78% Russell 2000
2.78% Australia
2.75% Hong Kong
2.60% Malaysia
2.56% South Korea
2.54% Paper
2.54% Mexico
2.52% Network
2.42% Financial
2.42% Semiconductors
2.37% Spain
2.27% Internet
2.27% Canada
2.02% France
2.01% Nasdaq Composite
1.94% Retailers
1.90% Energy
1.80% Computer Tech
1.78% Value Line
1.78% Switzerland
1.77% Banks
1.76% Consumer Staples
1.71% Chemicals
1.69% Netherlands
1.64% Insurance
1.55% Technology
1.52% S&P Small Caps
1.50% S&P 100
1.50% Russell 3000
1.50% Wilshire 5000
1.50% Oil Services
1.47% AMEX Composite
1.47% Disk Drives
1.46% NYSE Composite
1.46% Utilities
1.46% Oil
1.44% Dow Transports
1.41% S&P 500
1.39% Russell 1000
1.38% Commodity Related
1.37% Natural Gas
1.34% Drugs
1.31% Nasdaq 100
1.31% S&P Mid Caps
1.31% Australian Dollar
1.30% DOT
1.23% Health Care Products
1.21% United Kingdom
1.20% Italy
1.16% Health Care
1.14% Dow Industrial
1.14% Dow Composite
1.13% Consumer Discretionary
1.12% Austria
1.05% Biotechs
0.95% Health Care
0.92% Sweden
0.84% Japan
0.78% Industrial
0.74% British Pound
0.74% Canadian Dollar
0.70% Dow Utilities
0.47% Germany
0.39% Euro Index
0.20% Hardware
0.02% Hospitals
-0.23% Swiss Franc
-0.27% Belgium
-0.31% US Dollar Index
-1.11% 30Y T-Bond
-1.48% Japanese Yen
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.
