By Robert W. Colby, Senior Analyst TraderPlanet.com

Consolidation looks normal

Materials and Industrial sectors outperformed.

Financial and Energy underperformed.

Price momentum oscillators, oversold in late July, have been rising.

Sentiment is rising up from extremely oversold readings.


Major stock price indices were up and down and closed mixed to slightly higher on Monday. On the NYSE, advancing stocks outnumbered declining stocks by a 3 to 2 margin.

Reports of troubles in credit markets and hedge funds last week raised fear to Bear Market levels. The VIX fear index touched 37.5 during the session on 8/16/07, a level last seen on 10/10/02, which was the day the stock market made its Bear Market 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 oversold during the recent 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 demonstrated positive divergences since then by failing to confirm lower lows in price.

This August, momentum oscillators held above July’s deeper oversold readings on all price drops. Therefore, they have been showing Bullish divergence as compared to major price indices, such as the DJIA and S&P, which fell to new 5-month lows this past week. 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

1.07% , PEJ , Leisure & Entertainment, PEJ
6.49% , HGSI , Human Genome Sciences Inc
1.10% , PIV , Value Line Timeliness MidCap Gr, PIV
1.70% , PKB , Building & Construction, PKB
1.58% , NWL , NEWELL RUBBER
2.00% , RWR , REIT Wilshire, RWR
2.58% , URBN , Urban Outfitters Inc.
5.26% , TRB , TRIBUNE
0.39% , VB , Small Cap VIPERs, VB
6.07% , LOW , LOWES
4.19% , LLL , L-3 COMMS HLDGS
7.02% , RIMM , RESEARCH IN MOTION LTD
0.45% , IWR , MidCap Russell, IWR
0.42% , RZG , Growth SmallCap S&P 600, RZG
0.20% , IWV , LargeCap Blend Russell 3000, IWV
0.41% , FEU , Value LargeCap Euro STOXX 50 DJ, FEU
0.33% , IXP , Telecommunications Global, IXP
0.57% , XSD , Semiconductor SPDR, XSD
3.82% , HAS , HASBRO
0.60% , IXJ , Healthcare Global, IXJ
4.34% , PMCS , PMC SIERRA
0.51% , PWY , Value SmallCap Dynamic PS, PWY
5.48% , UNP , UNION PACIFIC
0.29% , EWG , Germany Index, EWG
2.94% , DE , DEERE & CO
0.99% , LAMR , Lamar Advertising Company
0.22% , IEF , Bond, 10 Year Treasury, IEF
0.29% , VXF , Extended Mkt VIPERs, VXF
2.45% , EPP , Pacific ex-Japan, EPP
3.87% , MYL , MYLAN LABS
0.36% , IWP , Growth MidCap Russell, IWP
0.96% , CDWC , CDW Corporation
0.33% , MDP , MEREDITH
2.77% , ODP , OFFICE DEPOT
0.59% , VO , MidCap VIPERs, VO
1.25% , HSIC , Henry Schein Inc
0.45% , PWT , Growth SmallCap Dynamic PS, PWT
0.66% , JKK , Growth SmallCap iS M, JKK
0.32% , EWL , Switzerland Index, EWL
0.95% , ILF , Latin Am 40, ILF
0.15% , UTH , Utilities H, UTH
1.77% , LTD , LIMITED BRANDS
1.20% , ESRX , EXPRESS SCRIPTS
2.54% , BNI , BURLINGTON NORTH
1.19% , PGJ , China LargeCap Growth G D H USX PS, PGJ
0.06% , PHW , Hardware & Electronics, PHW
0.45% , IJK , Growth MidCap 400 B, IJK
0.82% , MLNM , Millennium Pharmaceuticals Inc
0.16% , IYY , LargeCap Blend Total Market DJ, IYY
0.75% , EZA , South Africa Index, EZA

Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name

-0.54% , RFG , Growth MidCap S&P 400, RFG
-8.18% , MCO , MOODYS CORP
-0.65% , FE , FIRSTENERGY
-0.52% , FDL , Dividend Leaders, FDL
-0.20% , SWH , Software H, SWH
-6.24% , VC , VISTEON
-1.17% , PEY , Dividend High Yield Equity PS, PEY
-0.28% , EWP , Spain Index, EWP
-0.80% , ROST , Ross Stores Inc
-1.40% , PTEN , Patterson-UTI Energy Inc
-0.32% , IVE , Value S&P 500 B, IVE
-0.45% , BHH , Internet B2B H, BHH
-0.48% , MYY , Short 100% MidCap 400, MYY
-0.37% , HSP , HOSPIRA
-0.11% , JKE , Growth LargeCap iS M, JKE
-0.23% , VGK , European VIPERs, VGK
-0.47% , HHH , Internet H, HHH
-0.88% , GPC , GENUINE PARTS
-0.25% , PWV , Value LargeCap Dynamic PS, PWV
-0.29% , DVY , Dividend DJ Select, DVY
-0.09% , XLG , LargeCap Rydex Rus Top 50, XLG
-1.00% , IP , INTL PAPER
-0.12% , EWQ , France Index, EWQ
-1.21% , WOR , WORTHINGTON INDS
-0.74% , PHO , Water Resources, PHO
-0.28% , JKF , Value LargeCap iS M, JKF
-0.22% , XLE , Energy SPDR, XLE

Sectors: among the 9 major U.S. sectors, 7 rose and 2 fell.
Major Sectors Ranked for the Day
% Price Change, Sector

1.87% Materials
1.45% Industrial
0.75% Consumer Staples
0.53% Consumer Discretionary
0.47% Health Care
0.36% Technology
0.10% Utilities
-0.22% Energy
-1.33% Financial

Looking beyond the daily fluctuation to the major trends (listed in order of relative strength):

Energy (XLE) Bullish. Relative strength turned upward again on 8/7/07. XLE has been strong compared to the S&P since 3/12/03. Overweight.

Industrial (XLI) Bullish. Relative strength has underperformed in the short-term since making a new high on 8/3/07. 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) Uncertain. This defensive sector outperformed from 7/30/07 to 8/9/07 but has started to lag since. Market weight.

Consumer Staples (XLP) Uncertain. This defensive sector’s relative strength made a new 4-month high on 8/15/07 but has underperformed since. Market weight.

Health Care (XLV) Bearish. Short-term, this defensive sector’s relative strength made a new 7-week high on 8/15/07 but has fallen sharply since. 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 on 8/16/07, while relative strength made a new 6-month low on 8/17/07. 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 8/17/07. Underweight.

Financial (XLF) Bearish. Relative strength made a new 6-year low on 8/3/07 but has outperformed since then. 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 relative strength underperformed since 8/9/07. Price fell to a 4-month low on 8/16/07.

Growth underperformed Value since 8/3/07. Longer term, Growth outperformed Value since 5/16/07.

Small Caps outperformed Large Caps since 8/6/07. But the relative strength of Small Caps still has lagged Large Caps since 4/19/06.

Crude Oil prices appear to be consolidating since their high on 8/1/07. The longer-term trend still appears Bullish: 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 rose slightly but underperformed the SPY since 8/15/07. 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 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 are in a downtrend. 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 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 rose very slightly. Short-term, the dollar is still up from its low on 8/6/07. 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:

3.69% Australia
2.01% Gold Mining
1.87% Materials
1.83% Dow Transports
1.78% REITs
1.58% Chemicals
1.45% Industrial
1.36% Brazil
1.16% Oil Services
1.11% Australian Dollar
1.06% Commodity Related
0.95% Austria
0.91% Canada
0.89% Semiconductors
0.78% Network
0.75% Consumer Staples
0.74% Dow Composite
0.53% AMEX Composite
0.53% Consumer Discretionary
0.48% Airlines
0.47% S&P Mid Caps
0.47% Health Care
0.47% Canadian Dollar
0.39% Netherlands
0.37% 30Y T-Bond
0.36% Technology
0.35% Internet
0.33% Belgium
0.32% Dow Industrial
0.32% Value Line
0.32% Switzerland
0.30% S&P Small Caps
0.29% Disk Drives
0.28% Retailers
0.24% Hospitals
0.24% South Korea
0.23% Nasdaq 100
0.23% Drugs
0.20% Taiwan
0.18% Russell 2000
0.17% Biotechs
0.16% British Pound
0.15% Dow Utilities
0.14% Nasdaq Composite
0.13% Sweden
0.12% NYSE Composite
0.12% Oil
0.10% Utilities
0.09% Wilshire 5000
0.09% DOT
0.08% Health Care Products
0.08% Singapore
0.07% Russell 3000
0.06% Russell 1000
0.06% Italy
0.05% Swiss Franc
0.04% Hardware
0.00% Malaysia
0.00% United Kingdom
-0.02% Health Care
-0.03% S&P 500
-0.03% US Dollar Index
-0.06% S&P 100
-0.08% Euro Index
-0.10% Computer Tech
-0.10% Germany
-0.12% France
-0.22% Energy
-0.28% Spain
-0.32% Insurance
-0.60% Hong Kong
-0.73% Japanese Yen
-0.92% Paper
-0.97% Broker Dealers
-1.06% Natural Gas
-1.08% Mexico
-1.10% Japan
-1.33% Financial
-1.44% Banks

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.