Daily Stock Market Commentary – 1/9/2008

The technical picture is deteriorating at the same time that economic and fundamental trends appear hostile to stocks. Relatively weak fundamental reports appear probable for the days and weeks ahead.

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 performs best when investors worry about a recession. Relative Strength made a new all-time high on 1/8/08, and Price made a new all-time high on 12/10/07.

Consumer Staples (XLP) Bullish, Overweight. This defensive sector 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 3-year high on 1/8/08.

Health Care (XLV) Bullish, Overweight. XLV price moved up to a new 6-month high on 12/3/07. Relative Strength moved up to a new 15-month high on 1/8/08.

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.

Technology (XLK) Bearish, Underweight. Price made a new 4-month low, and Relative Strength made a new 3-month low. XLK/SPY has underperformed since 11/5/07.

Industrial (XLI) Bearish, Underweight. Price made a new 4-month low, and Relative Strength made a new 2-month low. XLI/SPY has underperformed since 8/3/07.

Consumer Discretionary (XLY) Bearish, Underweight. On 1/4/08, the XLY/SPY Relative Strength Ratio fell to its lowest level in 6 years. On 1/8/08, XLY price made a new 41-month low. Relative Strength has been trending down since 1/5/05.

Financial (XLF) Bearish, Underweight. On 1/8/08, 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 has been struggling choppy sideways since 11/7/07. Still, the long-term main trend for the Growth/Value ratio (IWF/IWD) has been rising since 8/8/06.

The Small Cap/Large Cap Relative Strength Ratio broke down to a new 2.5-year low. It 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 recovered part of Monday’s loss. Oil’s main trend remains 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 underperformed Crude Oil since 12/24/07.

February Gold Futures broke out to 880.30, a new all-time high. Gold penetrated resistance at the all-time high at 875 set on 1/21/80. Gold’s main trend remains 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) made a new 2-month price high but still has underperformed Gold since 10/31/07.

Inflation expectations have been weak since the peak on 11/12/07, based on the behavior of the ratio of two ETFs, TIP/IEF.

U.S. Treasury Bond prices are in a rising trend. 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 gave back half of the previous day’s gain. It fell to a new 4-week low last Friday, so that weekly trend is down. 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 25.43 and rising, remains above its 50-day and 200-day simple moving averages. 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 30.77 and rising, remains above its 50-day and 200-day simple moving averages. 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 0.97, indicating 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 0.86, 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.