Daily Stock Market Commentary – 1/7/2008

Negative payrolls and rising unemployment stoked fears of recession. The stock market appears to be reactive to such news reports. Furthermore, relatively weak economic reports appear probable for the days and weeks ahead. On Tuesday, 1/8/07, there will be reports on Pending Home Sales and Consumer Credit. Given the trends that by now have become quite evident, they seem likely to make grim reading.

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. On 1/3/08, both XLE Price and Relative Strength made new all-time highs. XLE has been strong compared to the S&P since 3/12/03.

Utilities (XLU) Bullish, Overweight. This defensive sector’s performs best when investors worry about a recession. Relative Strength made a new 6-year high on 1/4/08, 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 1/3/08. 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 performs best when investors worry about a recession. Price made a new all-time high on 12/10/07, and Relative Strength made a new 6-year high on 11/26/07.

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.

Technology (XLK) Neutral, Market Weight. Short term, Relative Strength turned down on 12/26/07. 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.

Consumer Discretionary (XLY) Bearish, Underweight. On 1/4/08, the XLY/SPY Relative Strength Ratio fell to its lowest level in 6 years, and XLY price made a new 17-month low. Relative Strength has been trending down since 1/5/05.

Financial (XLF) Bearish, Underweight. On 1/4/08, Relative Strength fell to a new 7-year low, and Price fell to a new 3-year low, thereby confirming a Bearish major trend.

Foreign stock indices have outperformed U.S. stock indices since 12/24/07. 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 underperformed the S&P since 12/26/07. 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 fell sharply and now looks weak for the short term. 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 it does not seem to be working at all this year. The main long-term trend is Relatively Bearish for Small Caps.

Crude Oil Futures fell below the previous day’s low. 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.

February Gold Futures consolidated with an “inside day” on the day after it made a new 28-year high. Gold’s 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 outperformed Gold Futures since 12/19/07 but still has underperformed since 10/31/07.

Inflation expectations have turned choppy. Based on the behavior of the ratio of two ETFs, TIP/IEF, the intermediate-term trend has been choppy since the peak on 11/12/07.

U.S. Treasury Bond prices have been in a strong uptrend over the past 6 trading days. Bonds could challenge their price top set 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 another new 4-week low, continuing 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 Bearish to Bullish 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 about 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 near 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 23.94 and rising, crossed above its 50-day and remains above its 200-day simple moving average. Longer term, 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 28.62 and rising, crossed above its 50-day and remains above its 200-day simple moving average. Longer term, 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 0.69, indicating somewhat 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 in call options. Its 4-year range is 0.35 to 1.28.

ISEE Call/Put Ratio fell to 0.93, 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.