Daily Stock Market Commentary – 9/12/2007

The stock market shrugged off a gloomy news report. Moody’s Investors Service said that the subprime mortgage crisis has spread, cutting off access to borrowing for many financially weak companies. Further, the default rate among U.S. speculative-grade companies may more than double from 2% to 4% during the next year.

Previously, I thought that the unfolding fallout from the subprime- and credit-market crisis might continue to unsettle the stock market—although not all stocks equally—as news of both damages and rescues leaked out little by little. But a market that rises in the face of bad news is stronger than I thought.

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.

5.54% , ERIC.O , LM Ericsson Telephone Company
5.56% , AMGN , AMGEN
1.22% , PRF , Value LargeCap Fundamental RAFI 1000, PRF
1.01% , KLD , LargeCap Blend Socially Responsible iS, KLD
1.55% , PWO , OTC Dynamic PS, PWO
4.11% , STJ , ST JUDE MEDICAL
0.79% , PWP , Value MidCap Dynamic PS, PWP
1.35% , VOX , Telecom Services VIPERs, VOX
1.03% , IXN , Technology Global, IXN
5.53% , HMA , HEALTH MGMT STK A
4.29% , RYAAY , Ryanair Holdings plc
3.66% , PBG , PEPSI BOTTLING
6.37% , WYNN , Wynn Resorts L
1.54% , EZU , EMU Europe Index, EZU
3.07% , MIL , MILLIPORE
2.06% , BDH , Broadband H, BDH
1.59% , FPX , IPOs, First Tr IPOX-100, FPX
1.67% , RPG , Growth S&P 500, RPG
4.24% , SWY , SAFEWAY
1.37% , VUG , Growth VIPERs, VUG
2.38% , XME , Metals & Mining SPDR, XME
1.68% , IJT , Growth BARRA Small Cap 600, IJT
3.70% , EWA , Australia Index, EWA
4.75% , SIRI , Sirius Satellite
1.33% , IWV , LargeCap Blend Russell 3000, IWV
4.34% , ERTS , ELECTRONIC ARTS
0.50% , SDY , Dividend SPDR, SDY
1.10% , IYK , Consumer Non-Cyclical, IYK
6.99% , LSI , LSI LOGIC
4.05% , CTXS , CITRIX SYSTEMS
1.44% , PBE , Biotech & Genome, PBE
1.59% , ADRD , Developed 100 BLDRS, ADRD
1.37% , WAT , WATERS
4.13% , CBE , COOPER INDS STK A
1.40% , SWH , Software H, SWH
0.72% , ISI , LargeCap Blend S&P 1500 iS, ISI
1.94% , TTH , Telecom H, TTH
0.83% , AV , AVAYA
2.08% , VNQ , REIT VIPERs, VNQ
3.21% , MCD , MCDONALDS
3.52% , KR , KROGER
0.73% , MKH , Market 2000 H, MKH
1.59% , EWN , Netherlands Index, EWN
1.31% , ADRA , Asia 50 BLDRS, ADRA
1.42% , FDV , Value 40 Large Low P/E FT DB, FDV
1.38% , VPL , Pacific VIPERs, VPL
2.91% , EPP , Pacific ex-Japan, EPP
1.42% , FEZ , Euro STOXX 50, FEZ
1.84% , HBAN , HUNTINGTON
1.31% , BBH , Biotech H, BBH

-7.43% , KG , KING PHARM
-0.43% , CBSS , COMPASS BANCSHARES
-2.18% , MAS , MASCO
-1.72% , LAMR , Lamar Advertising Company
-1.92% , CFC , COUNTRYWIDE FNCL
-1.63% , GWW , WW GRAINGER
-2.55% , XRAY , DENTSPLY International Inc
-31.92% , NVDA , NVIDIA
-1.96% , NIHD , NII Holdings, Inc.
-0.54% , GTW , GATEWAY
-0.98% , MYY , Short 100% MidCap 400, MYY
-2.00% , VC , VISTEON
-1.65% , NE , NOBLE
-0.59% , DUK , DUKE ENERGY
-0.74% , FITB , FIFTH THIRD BANC
-0.66% , LEN , Lennar Corp. (LEN)
-0.54% , NCC , NATIONAL CITY
-0.98% , SSCC , Smurfit-Stone Container Corporation
-0.81% , GIS , GENERAL MILLS
-0.56% , ACS , AFFILIATED COMPUTER
-0.28% , CPB , CAMPBELL SOUP
-0.21% , VRSN , VeriSign Inc
-1.30% , GCI , GANNETT
-0.21% , DIS , WALT DISNEY
-0.18% , AGG , Bond, Aggregate, AGG
-0.17% , APD , AIR PRODS & CHEM
-1.26% , RIG , TRANSOCEAN
-0.08% , TLT , Bond, 20+ Years Treasury, TLT
-0.19% , VLO , VALERO ENERGY
-0.22% , AES , AES
-2.97% , DXD , Short 200% Dow 30 PS, DXD
-0.08% , AW , ALLIED WASTE IND
-0.04% , CA , COMPUTER ASSOC
-0.02% , UST , UST
-0.02% , WYE , WYETH
-0.62% , MRO , MARATHON OIL
-0.06% , CTL , CENTURYTEL

Sectors: among the 9 major U.S. sectors, all 9 rose.

1.71% Energy
1.44% Technology
1.30% Materials
1.12% Consumer Discretionary
1.03% Financial
0.90% Industrial
0.76% Health Care
0.67% Consumer Staples
0.67% Utilities

Energy (XLE) Bullish. Relative strength made a new high on 9/6/07. XLE has been strong compared to the S&P since 3/12/03. Overweight.

Technology (XLK) Bullish. Relative strength made a new 2-year high on 9/6/07. XLK has been relatively strong compared to the S&P since its low on 7/24/06. Overweight.

Industrial (XLI) Bullish. Outperforming again since 8/17/07, following a brief period of underperformance from 8/3/07 to 8/17/07. Longer term, XLI has been relatively strong compared to the S&P since 8/9/06. Overweight.

Utilities (XLU) Improving since 8/31/07, but still down since 8/8/07. This defensive sector has underperformed since 8/9/07. Market weight.

Materials (XLB) Down since 9/6/07, but still improving since 8/17/07. Longer term, relative strength trending higher since 9/27/2000. Market weight.

Consumer Staples (XLP) Bearish. This defensive sector’s relative strength has underperformed since 8/15/07. Underweight.

Health Care (XLV) Bearish. Relative strength turned down on 4/19/07 and made a new 5-year low on 7/19/07, thereby confirming a major downtrend. Underweight.

Consumer Discretionary (XLY) Bearish. Price hit a new 10-month low on 8/16/07. Relative strength made another new 5-year low on 9/11/07. Underweight.

Financial (XLF) Bearish. Price hit a new 3-week low on 9/7/07. Relative strength has been falling since 2/20/07 and made a new 6-year low on 8/3/07. Major trends are down. Underweight.

Foreign stocks outperformed since 8/17/04. Before that, the short-term, July-August market shakeout hit global markets harder than the U.S. market. The EFA (the EAFE, international developed country stock markets, ex the U.S. and Canada) has substantially outperformed long term, since the Bull market started in 2002, and the secular trend probably is still Bullish.

NASDAQ relative strength sharply outperformed since 8/17/04. In addition, except for brief periods ranging between 1 to 6 days, NASDAQ has outperformed since 5/17/07. Longer term, NASDAQ has outperformed for more than a year, since 8/8/06.

Growth outperformed Value since 8/20/07. Also, Growth outperformed Value since 5/16/07. It looks like a strong trend.

Small Caps have sharply underperformed Large Caps since 8/21/07. Small Caps also underperformed since 4/19/06. These trends deserve respect.

The U.S. OIL FUND price in uptrend since 8/22/07. The short-term trend remains Bullish. Also, the longer-term trend is 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 both the USO and the SPY. 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 Trust ETF (NYSE: GLD) rose again, continuing a short-term uptrend. But longer term, GLD has underperformed the S&P since the GLD top on 5/12/06 at 70.20, a level that probably will be significant to traders.

Silver underperformed Gold since 9/4/07. 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 ETF (GDX) have been in a short-term recovery mode since 8/16/07. But GDX still has underperformed GLD since 7/19/07. The Gold Miners also underperformed the Gold Metal 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 rising short-term, since 8/31/07. But the larger 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 consolidating after a new 9-month high on 9/10/97. That new high confirmed upside momentum. Long-term, Bonds have recovered more than half of their losses since the price peak at 97.66 on 6/16/03 for iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT). Bonds remain reactive to news about the credit crisis: the worse the crisis, the higher the Bond prices.

U.S. dollar fell to another new 15-year low–all trends are clearly Bearish.

Daily Rankings of Major Global Markets, Ranked from Strongest to Weakest of the Day:

3.70% Australia
3.28% Singapore
3.22% Brazil
2.91% United Kingdom
2.78% Gold Mining
2.55% Sweden
2.39% Airlines
2.30% Biotechs
2.30% Germany
2.19% Disk Drives
2.14% South Korea
2.03% Austria
1.95% Hardware
1.87% Mexico
1.86% Retailers
1.78% AMEX Composite
1.78% Internet
1.71% Energy
1.70% Dow Transports
1.65% S&P Small Caps
1.64% Belgium
1.62% Russell 2000
1.59% Netherlands
1.59% Spain
1.58% Canada
1.58% France
1.57% Natural Gas
1.54% REITs
1.53% Hong Kong
1.52% Oil Services
1.50% Nasdaq Composite
1.49% Banks
1.48% NYSE Composite
1.48% Commodity Related
1.47% Nasdaq 100
1.47% Insurance
1.44% Technology
1.42% S&P 100
1.42% Dow Composite
1.41% DOT
1.40% Oil
1.38% Dow Industrial
1.37% Russell 3000
1.36% S&P 500
1.35% Russell 1000
1.34% Wilshire 5000
1.33% Computer Tech
1.33% Taiwan
1.31% Italy
1.30% Materials
1.28% Network
1.25% Chemicals
1.23% S&P Mid Caps
1.21% Hospitals
1.17% Malaysia
1.14% Dow Utilities
1.14% Drugs
1.12% Consumer Discretionary
1.12% Health Care
1.12% Health Care Products
1.10% Broker Dealers
1.06% Switzerland
1.03% Financial
1.03% Japan
0.99% Paper
0.98% Canadian Dollar
0.93% Australian Dollar
0.90% Industrial
0.86% Value Line
0.82% Semiconductors
0.76% Health Care
0.67% Consumer Staples
0.67% Utilities
0.17% Euro Index
0.16% British Pound
-0.19% 30Y T-Bond
-0.22% US Dollar Index
-0.23% Swiss Franc
-0.66% Japanese Yen

To sum up the current position of the U.S. stock market:

The unfolding fallout from the subprime- and credit-market crisis is worring investors and moving sentiment toward the Bearish side. News of both damages and rescues is still leaking out little by little. The market may remain unsettled and reactive day to day until the subprime- and credit-market crisis is better resolved.

Considering the long term, beyond the recent short-term downside shakeout, 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 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.