By Robert W. Colby, Senior Analyst TraderPlanet.com
Downside momentum is dissipating.
DJIA tested and closed above its 200-day simple moving average.
The S&P 500 held above its March low and closed higher.
Sentiment extremely oversold.
The sharp comeback may a sign that the rubber band may have been stretched too far in the downward direction and could be due a snap back.
Reports of troubles in credit markets and hedge funds have raised fear to Bear market levels. The VIX fear index touched 37.5 during the session, a level last seen on 10/10/02, which was the day the stock market made its bottom.
The CBOE Equity Volume and Put/Call Ratio (http://www.cboe.com/data/PutCallRatio.aspx) was 1.02 on 8/16/07, 1.05 on 8/15/07, and 1.08 on 8/14/07. This is the highest level of Puts relative to Calls in more than three years, since August 2004. Also, it is more than 4 standard deviations above the one-year mean of 0.64. This means that the Put/Call Ratio is at an extreme of Bearishness sentiment, which is Bullish according to the Art of Contrary Thinking. (See my book, page 167.)
Stocks became very oversold during this 4-week 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 have demonstrated positive divergences since then by failing to confirm lower lows in price.
As of Thursday’s close, these momentum oscillators were holding at or above recent deeper oversold readings. Therefore, they are showing Bullish divergence as compared to some of the major price indices, such as the DJIA and S&P, which fell to new 5-month lows intraday. Divergence at turning points is a typical technical phenomenon. But, of course, oversold readings and divergences come with no guarantees.
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
3.90% , VFH , Financials VIPERs, VFH
1.24% , PBJ , Food & Beverage, PBJ
8.10% , CMA , COMERICA
5.11% , RKH , Bank Regional H, RKH
8.86% , PWER , POWER ONE
2.14% , KCE , Capital Markets KWB ST, KCE
7.84% , MTB , M&T BANK
7.09% , NCC , NATIONAL CITY
1.71% , ELV , Value Large Cap DJ, ELV
5.10% , IYG , Financial Services DJ, IYG
5.54% , PNC , PNC FINL SVC
9.24% , WM , WASHINGTON MUT
3.27% , XHB , Homebuilders SPDR, XHB
3.24% , ICF , Realty Cohen & Steers, ICF
4.25% , C , CITIGROUP
5.45% , WFC , WELLS FARGO
1.36% , JKI , Value MidCap iS M, JKI
5.74% , JPM , J P MORGAN CHASE
2.90% , TROW , T ROWE PRICE GP
5.68% , SNV , SYNOVUS
4.59% , NTAP , NETWK APPLIANCE
1.81% , VIA , VIACOM INC. (New)
4.37% , STI , SUNTRUST BANKS
4.21% , KBH , KB HOME
6.60% , FDO , FAMILY DLR STRS
9.62% , FHN , FIRST TENNESSEE
6.02% , FNM , FANNIE MAE
8.04% , MBI , MBIA
4.90% , BK , BANK OF NEW YORK
3.94% , BEN , FRANKLIN RSC
12.88% , BSC , BEAR STEARNS
4.17% , GTW , GATEWAY
2.60% , IJS , Value SmallCap S&P 600 B, IJS
3.03% , IWN , Value SmallCap Russell 2000, IWN
5.19% , SOV , SOVEREIGN BANC
3.01% , XLF , Financial SPDR, XLF
4.76% , NTRS , NORTHERN TRUST
2.22% , IWM , SmallCap Russell 2000, IWM
5.06% , FII , FED INVESTORS STK B
5.90% , USB , US BANCORP
4.99% , RF , REGIONS FINAN
4.85% , WB , WACHOVIA
3.13% , LEN , Lennar Corp. (LEN)
1.59% , DSV , Value Small Cap DJ, DSV
5.38% , EQR , EQUITY RESIDENT BEN INT
3.31% , JKL , Value SmallCap iS M, JKL
3.88% , PCL , PLUM CREEK TIMB
2.36% , IWC , Microcap Russell, IWC
1.72% , PETM , PETsMART Inc
5.61% , AIV , APT INV MNGMT
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-1.31% , MKH , Market 2000 H, MKH
-2.54% , EKH , Europe 2001 H, EKH
-0.94% , IXJ , Healthcare Global, IXJ
-5.97% , THC , TENET HEALTHCARE
-6.06% , DYN , DYNEGY
-4.88% , SLV , Silver Trust iS, SLV
-4.25% , NIHD , NII Holdings, Inc.
-3.26% , IIH , Internet Infrastructure H, IIH
-4.64% , CBE , COOPER INDS STK A
-5.28% , AA , ALCOA
-5.42% , HSY , HERSHEY FOODS
-10.99% , CFC , COUNTRYWIDE FNCL
-3.90% , JCI , JOHNSON CONTROLS
-6.16% , FCX , FREEPRT MCMORAN STK B
-3.88% , TEVA , Teva Pharmaceutical Industries Limited
-6.11% , NOV , NATIONAL OILWELL VARC0
-5.90% , SIRI , Sirius Satellite
-3.91% , PMCS , PMC SIERRA
-2.65% , FITB , FIFTH THIRD BANC
-4.74% , SVU , SUPERVALU
-3.75% , EWY , South Korea Index, EWY
-2.56% , ITT , ITT INDS
-5.16% , PCAR , PACCAR
-2.90% , BA , BOEING
-2.59% , ETFC.O , E*TRADE FINANCIAL
-2.19% , GLD , Gold Shares S.T., GLD
-4.05% , CTSH , Cognizant Technology Solutions
-3.85% , PGJ , China LargeCap Growth G D H USX PS, PGJ
-2.15% , EWO , Austria Index, EWO
-5.64% , XMSR , XM Satellite R
-1.93% , RFG , Growth MidCap S&P 400, RFG
-5.03% , WAT , WATERS
-2.27% , EWS , Singapore Index, EWS
-2.58% , CMI , CUMMINS
-3.17% , TYC , TYCO INTL
-0.81% , IGE , Natural Resource iS GS, IGE
-2.29% , ANDW , ANDREW
-1.16% , XSD , Semiconductor SPDR, XSD
-2.84% , TXT , TEXTRON
-4.81% , LVLT , LEVEL 3 COMMUNICATIONS
-2.53% , EXC , EXELON CORP
-4.24% , EWA , Australia Index, EWA
-1.58% , PBW , WilderHill Clean Energy PS, PBW
-2.59% , WPI , WATSON PHARM
-3.00% , ETN , EATON
-5.28% , RYAAY , Ryanair Holdings plc
-4.16% , MU , MICRON TECH
-5.39% , DISCA , Discovery Holding Co.
-2.49% , MLNM , Millennium Pharmaceuticals Inc
-2.81% , USO , Oil, Crude, U.S. Oil Fund, USO
Sectors: among the 9 major U.S. sectors, 5 fose and 4 fell.
Major Sectors Ranked for the Day
% Price Change, Sector
3.01% Financial
0.26% Consumer Staples
0.14% Consumer Discretionary
0.05% Industrial
0.03% Health Care
-0.29% Utilities
-0.61% Energy
-0.65% Technology
-1.36% Materials
Energy (XLE) Bullish. Price fell steeply for the day but was way above its March low. Relative strength turned down, but only modestly. XLE is still in an uptrend compared to the S&P since 3/12/03. Overweight.
Industrial (XLI) Bullish. Price fell to a new 5-month low. Relative strength made a new high on 8/3/07 but has underperformed since. Longer term, XLI has been relatively strong compared to the S&P since 8/9/06. Overweight.
Technology (XLK) Bullish. XLK has been in a 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.
Utilities (XLU) Improving. This defensive sector’s price closed higher and closed above its recent closing price lows. Relative strength has been in a rising trend since 7/30/07. Market weight.
Consumer Staples (XLP) Improving. This defensive sector’s relative strength made a new 4-month high on 8/15/07. Price held well above its March price low. XLP outperformed since 6/19/07. 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. Short-term, this defensive sector’s relative strength made a new 7-week high on 8/1507. But longer term, relative strength made a new 5-year low on 7/19/07, thereby confirming a major downtrend. Underweight.
Materials (XLB) Bearish. Price broke down to a new 5-month low, while relative strength made a new 6-month low on 8/16/07. Underweight.
Consumer Discretionary (XLY) Bearish. Price hit a new 10-month low on 8/16/07. Relative strength made a new 11-month low on 8/16/07. Underweight.
Financial (XLF) Bearish. Relative strength made a new 6-year low on 8/3/07 but has outperformed since then. The sector may be acting sold out, for the moment at least. Still, major trends are down. Underweight.
Foreign stocks underperformed since 7/11/07. The short-term shakeout hit global markets harder than the U.S. market. Nevertheless, the EFA (the EAFE, international developed country stock markets, ex the U.S. and Canada) still has substantially outperformed long term, since the Bull market started in 2002.
NASDAQ price fell to a new 5-month low. Relative strength underperformed.
Growth sharply underperformed Value for the day. Longer term, Growth outperformed Value since 5/16/07.
Small Caps outperformed Large Caps for the day. But the relative strength of Small Caps still has lagged Large Caps since 4/19/06.
Crude Oil prices fell on higher volume. Although Crude fell to a new 5-week intraday low on 8/16/07, 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 the USO for the day but underperformed since 5/30/07. Longer 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 sharply and underperformed the SPY for the day. 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) sharply 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 broke down to another new 5-month low. The trend 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 rose as stocks fell. Bonds appear to be consolidating after their low on 6/12/07. But 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 turned down after a sharp 3-day rally that carried the greenback to a new 5-week high. On 8/13/07, I said the dollar was “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.”
3.87% Broker Dealers
3.80% Airlines
3.79% Japanese Yen
3.30% REITs
3.01% Financial
2.67% Insurance
2.30% Russell 2000
1.70% S&P Small Caps
1.06% 30Y T-Bond
0.70% Retailers
0.63% Germany
0.62% Value Line
0.38% S&P 100
0.35% Russell 3000
0.34% Swiss Franc
0.32% S&P 500
0.31% Wilshire 5000
0.28% Paper
0.26% Consumer Staples
0.22% Japan
0.19% Hardware
0.17% Russell 1000
0.17% Belgium
0.14% Consumer Discretionary
0.10% S&P Mid Caps
0.09% France
0.08% Disk Drives
0.05% Industrial
0.04% Switzerland
0.03% Health Care
0.00% Sweden
-0.02% NYSE Composite
-0.02% Canadian Dollar
-0.11% Semiconductors
-0.12% Dow Industrial
-0.14% US Dollar Index
-0.15% Hospitals
-0.16% Biotechs
-0.24% Dow Composite
-0.27% Dow Utilities
-0.29% Utilities
-0.32% Nasdaq Composite
-0.37% Spain
-0.38% Chemicals
-0.39% Netherlands
-0.41% Health Care
-0.41% Italy
-0.43% Dow Transports
-0.43% Network
-0.48% Euro Index
-0.54% Drugs
-0.55% Natural Gas
-0.61% Energy
-0.61% Hong Kong
-0.62% DOT
-0.64% Health Care Products
-0.65% Technology
-0.67% British Pound
-0.73% Mexico
-0.79% Internet
-0.82% Oil
-1.01% Nasdaq 100
-1.01% Computer Tech
-1.08% United Kingdom
-1.15% Taiwan
-1.26% Canada
-1.26% Malaysia
-1.29% AMEX Composite
-1.36% Materials
-2.15% Austria
-2.27% Singapore
-2.40% Commodity Related
-3.08% Oil Services
-3.17% Brazil
-3.75% South Korea
-4.24% Australia
-4.70% Australian Dollar
-5.14% Gold Mining
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 from the major low on 10/10/02 to the new all-time highs on 7/19/07. 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.
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.
