By Robert W. Colby, Senior Analyst TraderPlanet.com
More Tests of the Lows?
Stocks became very oversold during the recent 15 trading-day downside shakeout. Price momentum oscillators (such as RSI 14, Stochastics 14, Plus DI Directional Movement 14, MACD Histogram, and CCI) hit their most Bearish extreme lows from 7/24/07 to 7/31/07 and demonstrated positive divergences since then by failing to confirm lower lows in price.
As of Monday’s close, momentum oscillators were rising from oversold readings. Price indexes appeared to have made a low on 8/6/07 and successfully tested that low on 8/10/07. Such a test is a typical technical phenomenon. If the lows continue to hold, traders may interpret that as the market finding support and will start covering shorts and going long.
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
3.16% , BEAS , BEA Systems Inc
5.60% , SHLD , SEARS HOLDINGS
1.40% , IAH , Internet Architecture H, IAH
3.89% , IVGN , Invitrogen Corporation
3.45% , ADSK , AUTODESK
0.99% , EPP , Pacific ex-Japan, EPP
4.44% , ROK , ROCKWELL AUTOMAT
0.85% , FEU , Value LargeCap Euro STOXX 50 DJ, FEU
3.46% , AW , ALLIED WASTE IND
3.34% , MAS , MASCO
2.76% , ATVI , Activision Inc.
7.51% , EMC , EMC
1.04% , IGN , Networking, IGN
0.54% , IGM , Technology GS, IGM
1.55% , Q , QWEST COMMUNICAT
1.43% , EDS , ELECTR DATA
3.58% , SYY , SYSCO
0.41% , JKI , Value MidCap iS M, JKI
0.06% , ADRU , Europe 100 BLDRS, ADRU
0.44% , TIP , Bond, TIPS, TIP
0.22% , PWO , OTC Dynamic PS, PWO
0.19% , JKH , MidCap Growth iS M, JKH
0.30% , IYM , Basic Materials DJ US, IYM
3.15% , MNST , MONSTER WORLDWID
1.23% , VOX , Telecom Services VIPERs, VOX
0.07% , VDC , Consumer Staples VIPERs, VDC
3.33% , JNPR , Juniper Networks Inc
2.12% , FLR , FLUOR
0.52% , VAW , Materials VIPERs, VAW
0.24% , PIC , Insurance, PIC
0.05% , VHT , Health Care VIPERs, VHT
9.24% , CSC , COMPUTER SCIENCE
0.23% , PWB , Lg Cap Growth PSD, PWB
0.39% , USO , Oil, Crude, U.S. Oil Fund, USO
0.66% , STT , STATE STREET
0.48% , PZI , Micro Cap Zachs, PZI
2.72% , QCOM , QUALCOMM
0.55% , PBE , Biotech & Genome, PBE
2.81% , FISV , FISERV
0.33% , XLG , LargeCap Rydex Rus Top 50, XLG
0.19% , VTI , Blend Total Market VIPERs, VTI
0.35% , LQD , Bond, Corp, LQD
1.23% , HOT , STARWOOD HOTELS
2.13% , LSI , LSI LOGIC
2.28% , SRE , SEMPRA ENERGY
0.80% , RPV , Value S&P 500, RPV
1.12% , VIS , Industrials VIPERs, VIS
0.65% , AYE , ALLEGHENY ENERGY
0.61% , VGT , Info Tech VIPERs, VGT
0.39% , IYH , Healthcare DJ, IYH
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-0.53% , XSD , Semiconductor SPDR, XSD
-7.95% , MBI , MBIA
-5.41% , ETFC.O , E*TRADE FINANCIAL
-2.25% , RFMD , RF Micro Devices Inc
-0.97% , JKK , Growth SmallCap iS M, JKK
-0.40% , RFV , Value MidCap S&P 400, RFV
-1.41% , RZV , Value SmallCap S&P 600, RZV
-0.89% , KCE , Capital Markets KWB ST, KCE
-3.53% , ZION , ZIONS
-1.26% , JKL , Value SmallCap iS M, JKL
-0.69% , EWI , Italy Index, EWI
-0.43% , PHJ , Dividend Growth PS, PHJ
-2.59% , AGN , ALLERGAN
-3.52% , FNM , FANNIE MAE
-0.97% , PFM , Dividend Achievers PS, PFM
-0.35% , RZG , Growth SmallCap S&P 600, RZG
-0.76% , VDE , Energy VIPERs, VDE
-0.34% , DSG , Growth Small Cap DJ, DSG
-0.48% , BCR , C R BARD
-0.13% , PBJ , Food & Beverage, PBJ
-0.22% , RPG , Growth S&P 500, RPG
-0.25% , RFG , Growth MidCap S&P 400, RFG
-3.44% , SO , SOUTHERN
-0.96% , VFH , Financials VIPERs, VFH
-0.48% , EWP , Spain Index, EWP
-0.29% , TMW , Wilshire 5000 ST TM, TMW
-1.51% , LXK , LEXMARK INTL STK A
-0.57% , JKF , Value LargeCap iS M, JKF
-0.66% , DSV , Value Small Cap DJ, DSV
-0.14% , VCR , Consumer D. VIPERs, VCR
-0.33% , AVY , AVERY DENNISON
-2.41% , ABT , ABBOTT LABS
-0.01% , VPU , Utilities VIPERs, VPU
-0.63% , MI , MARSHAL & ILSLEY
-1.08% , SCHW.O , CHARLES SCHWAB
-0.74% , ROST , Ross Stores Inc
-0.08% , NY , Value LargeCap NYSE 100 iS, NY
-3.39% , ALTR , ALTERA
-0.56% , BMS , BEMIS
-0.24% , IGE , Natural Resource iS GS, IGE
-0.01% , IJK , Growth MidCap 400 B, IJK
Sectors: among the 9 major U.S. sectors, 7 rose and 2 fell.
Major Sectors Ranked for the Day
% Price Change, Sector
1.39% Technology
1.35% Industrial
0.55% Consumer Discretionary
0.51% Utilities
0.44% Materials
0.29% Health Care
0.12% Energy
-0.30% Consumer Staples
-0.90% Financial
Looking beyond the daily fluctuation to the major trends (listed in order of relative strength):
Energy (XLE) Bullish. Relative strength outperformed over the past 5 days after suffering a short-term downward correction from its peak on 7/25/07 to its low on 8/6/07. Longer term, XLE is still in an uptrend compared to the S&P since 3/12/03. Overweight.
Technology (XLK) Bullish. XLK has been in a mild short-term correction since its 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.
Industrial (XLI) Bullish. 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.
Materials (XLB) Bullish. Relative strength suffered a short-term downward correction from its peak on 7/18/07 to 8/7/07. But longer term, XLB has been relatively strong compared to the S&P since 9/27/00. Overweight.
Utilities (XLU) Improving. Relative strength has been in a rising trend since 7/30/07. Market weight.
Consumer Staples (XLP) Improving. XLP underperformed slightly over the past 2 days, but relative strength made a new 4-month high on 8/9/07. Previously, XLP was relatively weak compared to the S&P for nearly 5 years from 10/9/02 to 6/19/07. 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 turned up for the day but made a new 10-month low on 8/10/07. Relative strength made a new 11-month low on 8/8/07. Underweight.
Financial (XLF) Bearish. 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 underperformed. The short-term shakeout has spread to global markets. The next few days are critical in determining whether this is a false breakdown or a significant correction. The long-term trend may be 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. Now, there is some uncertainty about that.
NASDAQ relative strength underperformed slightly but jumped to a new 15-month high on 8/9/07. NASDAQ outperformed since 5/17/07. This appears to be a significant improvement.
Growth 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 outperformed Small Caps for the day and since 4/19/06. Relative Strength of Large/Small Caps made a new 2-year high on 8/6/07.
Crude Oil prices rose slightly after their new 5-week low on 8/10/07. The longer-term trend is still 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 fell moderately. 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) underperformed Gold for the day and 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.
Inflation expectations turned up–but within a trend that has 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 turned up modestly on lower volume. Bonds appear to be consolidating after their low on 6/12/07. 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 jumped to a new 5-week high, turning Bullish for the short-term. But, 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:
1.39% Technology
1.35% Industrial
1.31% Hardware
1.09% United Kingdom
1.00% Dow Transports
0.63% Disk Drives
0.58% Mexico
0.55% Consumer Discretionary
0.51% Utilities
0.51% Internet
0.48% Germany
0.46% Network
0.46% Singapore
0.45% US Dollar Index
0.44% AMEX Composite
0.44% Dow Utilities
0.44% Materials
0.39% Dow Composite
0.39% Computer Tech
0.32% Oil Services
0.30% Insurance
0.29% Health Care
0.28% Commodity Related
0.26% Health Care
0.26% Retailers
0.24% Biotechs
0.24% South Korea
0.22% Hospitals
0.22% Australia
0.21% S&P Mid Caps
0.20% 30Y T-Bond
0.14% Japan
0.12% Energy
0.05% DOT
0.05% Canadian Dollar
0.02% Natural Gas
0.01% Russell 1000
0.01% Health Care Products
-0.07% Japanese Yen
-0.08% Oil
-0.09% Russell 3000
-0.16% S&P 100
-0.24% Drugs
-0.24% Canada
-0.24% Switzerland
-0.26% Value Line
-0.28% Australian Dollar
-0.30% Consumer Staples
-0.30% Chemicals
-0.36% Malaysia
-0.38% Sweden
-0.47% British Pound
-0.48% Spain
-0.51% Semiconductors
-0.54% Airlines
-0.54% Euro Index
-0.57% Taiwan
-0.64% Hong Kong
-0.66% REITs
-0.67% Brazil
-0.67% Swiss Franc
-0.69% Italy
-0.85% S&P Small Caps
-0.89% Gold Mining
-0.90% Financial
-1.03% Belgium
-1.14% Banks
-1.57% Broker Dealers
-2.46% Austria
-3.27% 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.
