Daily Stock Market Commentary – 1/3/2008

The stock market appears to be reactive to news reports, and that has led to choppy price action. Relatively weak economic reports appear probable for the days ahead. On Thursday, there will be reports on initial unemployment claims, factory orders, and auto and truck sales. On Friday, nonfarm payrolls report for December and ISM Services. Buckle your seatbelts.

The S&P 500 broke down below the lows of the previous 8 trading days, confirming a short-term downtrend. It remains below its popular 50-day and 200-day simple moving averages, and the 50-day remains below the 200-day, suggesting an intermediate-term downward correction.

The DJ Industrials, Transports, and Utilities all broke down below their lows of the December, confirming short-term downtrends.

The Breadth of the Market remains Bearish. The Cumulative Daily Advance-Decline lines remain relatively weak for the NYSE and especially for the NASDAQ. New Lows have outnumbered New Highs since October.

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.

Energy (XLE) Bullish, Overweight. Relative Strength made a new all-time high on 1/2/08. XLE made an all-time price high on 12/26/07. XLE has been strong compared to the S&P since 3/12/03.

Utilities (XLU) Bullish, Overweight. This defensive sector’s Relative Strength made a new 6-year high on 12/5/07, and price made a new all-time high on 12/10/07.

Materials (XLB) Bullish, Overweight. The XLB/SPY Relative Strength Ratio made a new all-time high on 11/8/07. Price made new all-time high on 10/29/07. The long-term Relative Strength trend has strongly outperformed since 9/27/2000.

Consumer Staples (XLP) Bullish, Overweight. This defensive sector’s price made a new all-time high on 12/10/07, and Relative Strength made a new 6-year high on 11/26/07.

Technology (XLK) Neutral, Market Weight. Relative Strength turned up from a low on 11/30/07. And, long term, XLK has been relatively strong compared to the S&P since its low on 7/24/06.

Industrial (XLI) Neutral, Market Weight. Price and Relative Strength have been chopping sideways since 8/3/07. Longer-term trends appear Bullish.

Health Care (XLV) Neutral, Market Weight. XLV price moved up to a new 6-month high on 12/3/07. Relative Strength moved up to a new 13-month high on 11/27/07.

Consumer Discretionary (XLY) Bearish, Underweight. On 1/2/08, the XLY/SPY Relative Strength Ratio fell to its lowest level in 6 years, and XLY price made a new 15-month low. Relative Strength has been trending down since 1/5/05.

Financial (XLF) Bearish, Underweight. On 1/2/08, the XLF/SPY Relative Strength Ratio fell to its lowest level in 7 years. Relative Strength has been trending down since 2/20/07. XLF price hit a new 2.5-year low on 11/26/07.

Foreign stock indices have underperformed U.S. stock indices short term, since 11/27/07. The EFA (the EAFE, international developed country stock markets, ex the U.S. and Canada) made a new price high on 10/31/07 and a new relative strength high on 11/27/07. EFA has substantially outperformed long term, since the Bull market started in 2002, and the secular trend is still Bullish. My Top 10 ETF Relative Strength Ranks have been mostly Foreign for many months.

NASDAQ Composite and NASDAQ 100 outperformed the S&P since 12/17/07. Longer term, NASDAQ outperformed from 8/8/06 to 11/7/07, including a new 6-year Relative Strength high on 11/7/07 and a new price high on 10/31/07.

Growth Stock/Value Stock Relative Strength Ratio has been in a moderately rising trend since 11/30/07. The long-term, the main trend for the Growth/Value ratio (IWF/IWD) has been rising since 8/8/06.

The Small Cap/Large Cap Relative Strength Ratio has been trending down since 4/19/06. Historically, year end and early January often have been good for Small Caps. But the main long-term trend is Relatively Bearish for Small Caps. The ratio fell to a new 2.5-year low on 12/17/07. Small Caps substantially underperformed Large Caps since 4/19/06.

Crude Oil Futures hit $100, a new all-time high. Crude Oil penetrated resistance at 98.12, its high of 11/21/07. Oil’s main trend is obviously Bullish. The U.S. OIL FUND ETF (AMEX: USO) is not a pure play on Crude Oil, although it generally moves in the same direction.

The Energy stock sector outperformed the USO since 11/26/07. Previously, over the 6 months from 5/30/07 to 11/26/07, XLE lagged oil the commodity.

February Gold Futures broke out to a new 28-year high. Gold penetrated resistance at 855, its high of 11/7/07. The next resistance is at the all-time high at 875 set on 1/21/80. Gold’s main trend is obviously Bullish.

Silver’s main trend is Bearish compared to Gold. The iShares Silver Trust (AMEX: SLV) has been relatively weak since 12/7/06.

The Gold Miners ETF (GDX) has underperformed Gold Futures since 10/31/07. Price made a new 13-week low on 12/18/07.

Inflation expectations turned up. But the intermediate-term trend has been choppy with a downward bias since to peak on 11/12/07, based on the behavior of the ratio of two ETFs, TIP/IEF.

U.S. Treasury Bond prices rose sharply to their highest levels in 4 weeks. Bonds appear to have ended their intermediate-term correction phase since their price top on 11/26/07. Bonds remain reactive to news about the credit crisis: the worse the credit crisis, the higher the Bond prices; the better the credit crisis, the lower the Bond prices.

The U.S. dollar fell to a new 4-week low, signaling a serious downside correction. Support is at the oversold low at 74.65 on 11/23/07. There could be overhead resistance at the 77.86 high of 12/20/07. The main trend remains Bearish.

The Art of Contrary Thinking: The business and financial news has flipped from Bullish to Bearish and back again. Investors’ moods and stock volatility have jumped up and down abruptly with the latest news. When everything shifts so dramatically from one day to the next, risk control becomes more important than aggressive profit seeking. Stay flexible.

Sentiment/Contrary Opinion: Bullish opinion is below normal. According to the weekly Investors Intelligence newsletter survey as of 1/2/08, there were 52.2% Bulls and 24.5% Bears. The ratio of Bullish advisors to Bearish advisors fell to 2.13 to 1, which is slightly below its 4-year simple moving average at 2.14 and its 4-year median at 2.17. The ratio’s 4-year range is 1.00 to 3.46.

VIX “Fear Index”, now at 23.17 and rising, crossed above its 50-day simple moving average, indicating relatively high and rising levels of fear in recent weeks. VIX has been in a rising trend since it hit a 13-year low of 9.89 on 1/24/07. The all-time high was 45.74 on 10/8/98. VIX is a market estimate of expected constant 30-day volatility, calculated by weighting S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates.

VXN “Fear Index”, now at 27.14 and rising, crossed above its 50-day simple moving average, indicating relatively high and rising levels of fear in recent weeks. VXN has been in a rising trend since it hit its all-time low of 12.61 on 7/29/05. The all-time high was 114.23 on 10/8/98. VXN measures Nasdaq Volatility using a method comparable to that used for VIX.

CBOE Put/Call Ratio rose to 0.78, indicating more pessimistic sentiment. It is above its 4-year simple moving average and median at 0.62. That means there was more trading activity in put options and less trading in call options than normal. Its 4-year range is 0.35 to 1.28.

ISEE Call/Put Ratio fell to 1.03, indicating pessimistic sentiment. It is below its 4-year simple moving average at 1.50 and its 4-year median at 1.47. That means customers opened fewer long call options and more long put options than normal. Its 4-year range is 0.51 to 3.04.

Fundamentals: The 2003-2007 Bull Market was fed by abundant global liquidly, M&A, leveraged buyouts, corporate stock buybacks, and the net balance of positive earnings surprises. The unfolding fallout from the subprime credit market crisis appears to have derailed that engine. Economic statistics are weakening and at the same time inflation is rising, suggesting Stagflation.