By Robert W. Colby, Senior Analyst TraderPlanet.com
Consolidation is normal and natural after a big price move.
Volatility is settling down, and market conditions appear to be returning to normal.
Falling Energy prices were a big drag on the major price indexes.
Crude Oil prices fell steeply to a new 8-week low.
Airlines benefited from falling Energy prices.
Price momentum oscillators, oversold in late July, have been rising.
Sentiment is rising up from extremely oversold readings.
Consolidation. Tuesday marked the second consecutive session of consolidation. Such neutral sideways indecisive price action within a relatively narrow trading range is entirely normal and natural following a big move, such as the relatively steep correction experienced over the few weeks. Basically, traders have been upset, and they are treading cautiously and lightly until they can get a better handle on the developing credit situation. This is rational behavior in the face of uncertainty. Volatility is settling down, and market conditions appear to be returning to normal.
Commodity prices are deflating. The CRB index closed at its lowest closing price since 2/12/07. Crude Oil prices fell steeply to a new 8-week low.
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 last 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
2.38% , IIH , Internet Infrastructure H, IIH
3.28% , CEPH , Cephalon Inc
4.22% , PDCO , Patterson Dental Company
7.12% , LSI , LSI LOGIC
2.83% , ASN , ARCHSTONE-SMITH TRUST
4.35% , HOT , STARWOOD HOTELS
2.80% , FDC , FIRST DATA
1.59% , PTE , Telecommunications & Wireless, PTE
0.91% , BHH , Internet B2B H, BHH
1.07% , IYZ , Telecom DJ US, IYZ
0.35% , JKG , MidCap Blend Core iS M, JKG
4.38% , AAPL , APPLE COMPUTER
1.01% , ANDW , ANDREW
2.60% , CCU , CLEAR CHANNEL
0.19% , RZG , Growth SmallCap S&P 600, RZG
0.65% , RZV , Value SmallCap S&P 600, RZV
3.43% , EMC , EMC
3.79% , FLR , FLUOR
5.41% , NVDA , NVIDIA
2.00% , WWY , WM WRIGLEY JR
0.41% , IGN , Networking, IGN
3.86% , CAR , Avis Budget Group, Inc. (CAR)
0.57% , IGV , Software, IGV
6.35% , ETFC.O , E*TRADE FINANCIAL
3.73% , AMZN , Amazoncom Inc
0.84% , BOL , BAUSCH & LOMB
3.55% , TRB , TRIBUNE
0.54% , JKI , Value MidCap iS M, JKI
3.33% , ATI , ALLEGHENY TECH
1.13% , ACS , AFFILIATED COMPUTER
2.92% , SNPS , Synopsys Inc
0.66% , PKB , Building & Construction, PKB
3.07% , HRB , H&R BLOCK
0.66% , PEY , Dividend High Yield Equity PS, PEY
0.93% , FPX , IPOs, First Tr IPOX-100, FPX
2.76% , CHKP , Check Point Software Technologies Ltd
2.62% , COF , CAPITAL ONE FNCL
4.88% , GRMN , GARMIN LTD
1.51% , HCR , MANOR CARE
5.92% , XMSR , XM Satellite R
0.48% , PXQ , Networking, PXQ
2.92% , GT , GOODYEAR TIRE
3.00% , CIT , CIT GROUP
2.44% , NSM , NATL SEMICONDUCT
2.38% , VRSN , VeriSign Inc
1.48% , AT , ALLTEL
2.95% , CMI , CUMMINS
0.48% , VCR , Consumer D. VIPERs, VCR
1.85% , GWW , WW GRAINGER
0.38% , IJS , Value SmallCap S&P 600 B, IJS
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-7.58% , UST , UST
-0.54% , RFG , Growth MidCap S&P 400, RFG
-3.70% , MNST , MONSTER WORLDWID
-0.32% , MKH , Market 2000 H, MKH
-2.64% , STT , STATE STREET
-1.14% , PXE , Energy Exploration & Prod, PXE
-1.36% , EWD , Sweden Index, EWD
-0.49% , EWI , Italy Index, EWI
-2.91% , JNY , JONES APPAREL
-1.81% , WLP , WELLPOINT HEALTH
-1.66% , COH , COACH
-0.04% , FDV , Value 40 Large Low P/E FT DB, FDV
-3.79% , RDC , ROWAN COMPANIES
-1.65% , GR , GOODRICH CORP
-1.70% , IPG , INTERPUBLIC GRP
-2.07% , USO , Oil, Crude, U.S. Oil Fund, USO
-3.79% , MYL , MYLAN LABS
-1.38% , AFL , AFLAC
-1.29% , YHOO , YAHOO
-0.86% , PXJ , Oil & Gas, PXJ
-1.15% , ADI , ANALOG DEVICES
-1.43% , CIEN.O , CIENA
-1.36% , DELL , DELL
-1.45% , EWT , Taiwan Index, EWT
-1.60% , ZMH , ZIMMER HLDGS
-0.69% , NOC , NORTHROP GRUMMAN
-1.57% , VDE , Energy VIPERs, VDE
-2.44% , EMR , EMERSON ELECTRIC
-1.39% , QCOM , QUALCOMM
-0.17% , ELV , Value Large Cap DJ, ELV
-0.56% , ODP , OFFICE DEPOT
-3.05% , GTW , GATEWAY
-1.25% , AES , AES
-0.36% , EWL , Switzerland Index, EWL
-1.23% , LRCX , LAM RESEARCH CORP
-1.08% , THC , TENET HEALTHCARE
-1.50% , BRCM , BROADCOM STK A
-1.09% , CSC , COMPUTER SCIENCE
-0.23% , MMC , MARSH & MCLENNAN
-0.74% , PHJ , Dividend Growth PS, PHJ
-1.53% , AN , AUTONATION
-0.40% , CBSS , COMPASS BANCSHARES
-0.72% , SIRI , Sirius Satellite
-0.38% , EKH , Europe 2001 H, EKH
-1.56% , SEE , SEALED AIR
-3.40% , EXPD , Expeditors International WA
-0.92% , LXK , LEXMARK INTL STK A
-0.20% , VIG , Dividend Appreciation Vipers, VIG
-1.55% , CTSH , Cognizant Technology Solutions
-0.71% , LNC , LINCOLN NATL
Sectors: among the 9 major U.S. sectors, 5 rose and 3 fell.
Major Sectors Ranked for the Day
% Price Change, Sector
0.67% Consumer Discretionary
0.61% Materials
0.32% Financial
0.32% Technology
0.27% Health Care
0.00% Consumer Staples
-0.10% Utilities
-0.39% Industrial
-1.41% Energy
Energy (XLE) Bullish. The minor pullback this week does not erase the relative strength upturn since 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 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.
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.
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.
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.
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.
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 outperformed since 8/17/07. NASDAQ underperformed from 8/9/07 to 8/17/07, but that might have been a temporary short-term correction of a larger uptrend. Longer term, NASDAQ has outperformed for more than a year, since 8/8/06.
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 fell steeply to a new 8-week low. This weakness could be part of a short-term correction since the 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 fell slightly and 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 slightly over the past 2 days. 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.
1.32% Hong Kong
1.26% Japan
1.17% Internet
1.16% REITs
1.10% Broker Dealers
1.07% Retailers
1.00% DOT
0.95% Nasdaq 100
0.70% Gold Mining
0.68% Dow Utilities
0.67% Consumer Discretionary
0.61% Materials
0.61% Insurance
0.61% Network
0.51% Nasdaq Composite
0.48% Biotechs
0.48% 30Y T-Bond
0.47% Hospitals
0.42% AMEX Composite
0.42% Japanese Yen
0.41% Banks
0.39% Commodity Related
0.38% Computer Tech
0.38% Canada
0.32% Value Line
0.32% Financial
0.32% Technology
0.27% Health Care
0.22% S&P Mid Caps
0.22% Brazil
0.21% S&P Small Caps
0.18% Wilshire 5000
0.17% Russell 1000
0.17% Russell 3000
0.13% Chemicals
0.13% US Dollar Index
0.12% Russell 2000
0.11% S&P 500
0.07% NYSE Composite
0.04% Health Care Products
0.03% Health Care
0.03% France
0.01% Drugs
0.00% Consumer Staples
-0.02% Semiconductors
-0.02% Mexico
-0.03% Netherlands
-0.04% S&P 100
-0.04% Swiss Franc
-0.07% Euro Index
-0.10% Utilities
-0.12% Hardware
-0.18% Dow Composite
-0.19% British Pound
-0.23% Dow Industrial
-0.30% Paper
-0.31% Austria
-0.32% Belgium
-0.35% Disk Drives
-0.36% Switzerland
-0.39% Industrial
-0.39% Australia
-0.39% Germany
-0.47% Australian Dollar
-0.49% Italy
-0.50% Canadian Dollar
-0.55% Spain
-0.68% Dow Transports
-0.78% South Korea
-0.81% United Kingdom
-1.21% Oil
-1.23% Natural Gas
-1.34% Oil Services
-1.36% Sweden
-1.41% Energy
-1.45% Taiwan
-1.76% Malaysia
-2.65% Singapore
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.
