Daily Stock Market Commentary – 10/22/2007

On Friday, major stock price indices gaped down on the open and sank under steady and heavy selling pressure all day. The U.S. stock market has given back a Fibonacci ratio 38.2% of its August-October gain. It is down about 4.4% from its closing high on 10/9/07. That magnitude of a correction is entirely typical and normal. The market does not move in a straight line, and downside shakeouts are to be expected in any uptrend. The long-term Primary Tide Trend remains Bullish, according to the Dow Theory.

VIX “Fear Index” rose sharply. VIX jumped to 22.96 on 10/19/07, its highest level in 5 weeks and 1.6 standard deviations above its one-year mean. Apparently, options traders are feeling fairly Bearish, which may Bullish according to the Art of Contrary Thinking. (See my book, page 167.) In addition, VIX is now above its 10-year average at about 20.8. 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.

Put/Call Ratio shows moderate Bearishness. As of 10/19/07, the CBOE Equity Volume and Put/Call Ratio (http://www.cboe.com/data/PutCallRatio.aspx) rose to 0.73, which is about one standard deviation above its half-year mean, indicating moderate Bearishness. It reached an extreme of 1.08 on 8/14/07, which was the highest level of Puts relative to Calls in more than three years, since August 2004. That may have been a catalyst behind the market’s recovery.

ISEE Call/Put Ratio shows moderate Bearishness. As of 10/19/07, the ISEE Call/Put Ratio fell to 1.01, which is about one standard deviation below its half-year mean, indicating that customers opened more long put options and fewer long call options than normal.

Breadth ended 69% net Bearish, with many more Declining stocks than Advancing stocks on the NYSE. The Cumulative Daily Advance-Decline line for the NASDAQ broke down to a new low.

Up Volume finished the day 90% net Bearish, with much more Down Volume than Up Volume on the NYSE.

Total volume rose on both the NYSE and the NASDAQ, indicating a more emotional trading climate.

New Highs-New Lows ratios ended 42% net Bearish.

Very short-term indicators show that Bearish momentum has accelerated again and that the market is already oversold. Please note that “oversold” does not imply an immediate bounce.

Seasonal tendencies are clearly a concern to many traders. October has been a losing month on average, based on 101 years of month-end closing prices for the Dow-Jones Industrial Average, from 1900 through 2000. (See my book, pages 403-410.) October has seen some very notable downside shakeouts in the past. The media is all over this story, however, so a cautious exploration of the Art of Contrary Thinking could prove to be a good idea.

The market is a trick or treat monster, perhaps more so than usual at this time. Therefore, I am considering any and all opinions lightly, taking them with a few grains of salt, while staying alert, flexible, and ready to change quickly as “the tape” dictates.

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

2.60% , MYY , Short 100% MidCap 400, MYY
8.09% , PMCS , PMC SIERRA
3.02% , PSQ , Short 100% QQQ, PSQ
5.18% , DXD , Short 200% Dow 30 PS, DXD
4.12% , BSX , BOSTON SCIENT
2.82% , DOG , Short 100% Dow 30, DOG
5.19% , SDS , Short 200% S&P 500 PS, SDS
6.83% , MZZ , Short 200% MidCap 400 PS, MZZ
1.77% , MOLX , MOLEX
4.76% , QID , Short 200% QQQ PS, QID
1.49% , TLT , Bond, 20+ Years Treasury, TLT
1.09% , SHW , SHERWIN WILLIAMS
2.66% , SH , Short 100% S&P 500, SH
0.46% , AGG , Bond, Aggregate, AGG
0.26% , SHY , Bond, 1-3 Year Treasury, SHY
0.86% , IEF , Bond, 10 Year Treasury, IEF
2.32% , FHN , FIRST TENNESSEE
0.80% , GOOG , Google
0.47% , KG , KING PHARM
0.53% , FRX , FOREST LABS STK A
0.11% , NKE , NIKE STK B
0.17% , AV , AVAYA
0.79% , LXK , LEXMARK INTL STK A
0.14% , ANDW , ANDREW
0.08% , KBH , KB HOME
0.06% , AT , ALLTEL
0.02% , HLT , HILTON HOTELS
0.85% , TIP , Bond, TIPS, TIP
0.65% , LQD , Bond, Corp, LQD

Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name

-2.80% , IAH , Internet Architecture H, IAH
-2.51% , NYC , LargeCap Blend NYSE Composite iS, NYC
-3.50% , IWC , Microcap Russell, IWC
-11.02% , SLB , SCHLUMBERGER
-8.56% , MMM , 3M
-3.01% , VFH , Financials VIPERs, VFH
-2.68% , RFV , Value MidCap S&P 400, RFV
-2.43% , RPV , Value S&P 500, RPV
-15.11% , SNDK , SanDisk Corporation
-3.29% , IJR , SmallCap S&P 600, IJR
-5.27% , HAL , HALLIBURTON
-3.10% , JKJ , SmallCap Core iS M, JKJ
-5.48% , DDM , Ultra Dow30 Double, DDM
-5.67% , PXJ , Oil & Gas, PXJ
-4.46% , IYE , Energy DJ, IYE
-2.66% , ONEQ , Growth LargeCap NASDAQ Fidelity, ONEQ
-9.14% , NOV , NATIONAL OILWELL VARC0
-5.12% , TRB , TRIBUNE
-5.98% , DYN , DYNEGY
-2.72% , JKK , Growth SmallCap iS M, JKK
-2.55% , PHW , Hardware & Electronics, PHW
-4.95% , ILF , Latin Am 40, ILF
-4.99% , MVV , Ultra MidCap400 Double, MVV
-2.30% , JKD , LargeCap Blend Core iS M, JKD
-3.19% , PZJ , SmallCap PS Zacks, PZJ
-5.10% , PETM , PETsMART Inc
-6.35% , BIG , BIG LOTS
-2.67% , VTV , Value VIPERs, VTV
-5.65% , SSO , Ultra S&P500 Double, SSO
-4.59% , VDE , Energy VIPERs, VDE
-3.43% , PPA , Aerospace & Defense, PPA
-3.04% , VXF , Extended Mkt VIPERs, VXF
-2.18% , FEU , Value LargeCap Euro STOXX 50 DJ, FEU
-5.80% , EMR , EMERSON ELECTRIC
-2.84% , PXQ , Networking, PXQ
-2.80% , JKG , MidCap Blend Core iS M, JKG
-4.79% , ITT , ITT INDS
-5.81% , BHI , BAKER HUGHES
-2.57% , VTI , Blend Total Market VIPERs, VTI
-2.39% , VCR , Consumer D. VIPERs, VCR
-5.27% , CAT , CATERPILLAR
-2.50% , BDH , Broadband H, BDH
-2.83% , IWR , MidCap Russell, IWR
-3.29% , VIS , Industrials VIPERs, VIS
-3.35% , ZMH , ZIMMER HLDGS
-2.06% , ADRU , Europe 100 BLDRS, ADRU
-6.18% , OIH , Oil Services H, OIH
-2.74% , DSV , Value Small Cap DJ, DSV
-3.01% , PZI , Micro Cap Zachs, PZI
-6.13% , RYAAY , Ryanair Holdings plc

Sectors: among the 9 major U.S. sectors, all 9 fell.
Major Sectors Ranked for the Day
% Price Change, Sector

-1.03% Consumer Staples
-1.21% Health Care
-2.18% Materials
-2.21% Utilities
-2.23% Consumer Discretionary
-2.37% Technology
-2.78% Industrial
-2.95% Financial
-4.74% Energy

Looking beyond the daily fluctuation to the major trends (listed in order of long-term relative strength):

Energy (XLE) Bullish, Overweight. XLE made an all-time closing price high on 10/16/07, and XLE made an all-time high in relative strength 10/18/07. XLE has been strong compared to the S&P since 3/12/03.

Technology (XLK) Bullish, Overweight. XLK made a new 6-year price high on 10/11/07, and relative strength made a new 2-year high on 10/19/07. Long term, XLK has been relatively strong compared to the S&P since its low on 7/24/06.

Materials (XLB) Bullish, Overweight. Price made a new high on 10/11/07. Relative strength made a new 3-month high on 10/19/07. The relative strength trend strongly outperformed since the price shakeout low on 8/16/07, and its long term trend has been Bullish since 9/27/2000.

Industrial (XLI) Bullish, Overweight. Industrial stock sector price made an all-time price high on 10/10/07. Longer term, XLI has been relatively strong compared to the S&P since 8/9/06.

Consumer Staples (XLP) Neutral, Market Weight. This defensive sector’s relative strength has improved since its low on 10/9/07.

Utilities (XLU) Neutral, Market Weight. This defensive sector’s relative strength has improved modestly since its low on 9/28/07.

Health Care (XLV) Bearish, Underweight. Relative strength has been trending down since 10/9/02, and it made a new 5-year low on 7/19/07, thereby confirming a major downtrend.

Consumer Discretionary (XLY) Bearish, Underweight. Price hit a new 10-month low on 8/16/07. Relative strength made another new 6-year low on 9/27/07 and is back down to that low now.

Financial (XLF) Bearish, Underweight. The XLF/SPY relative strength ratio fell to its lowest level in more than 6 years. The long-term trend of relative strength has been trending down since 2/20/07.

Foreign stock indices’ price fell but Relative Strength versus the S&P 500 rose to a new high. The EFA (the EAFE, international developed country stock markets, ex the U.S. and Canada) made new price and relative strength highs on 10/11/07. 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 are all Foreign.

NASDAQ Composite index has been Relatively Strong, compared to most other indices. Price made a new 6-year high on 10/11/07. Relative strength made a new 17-month high on 10/18/07. Longer term, NASDAQ has outperformed since 8/8/06.

Growth stocks’ price fell but Relative Strength versus Value stocks rose to a another new 20-month high. Growth price made a new 6-year high on 10/11/07 and outperformed Value stocks since 8/8/06. The main trend is confirmed Bullish.

Small Caps substantially underperformed Large Caps since 4/19/06, and the main long-term trend is Bearish for Small Caps.

November Crude Oil Futures prices hit another new record high at $90.07 a barrel intraday but reversed to close lower. Support appears at previous resistance at 84.10 and at previous minor lows in the 78.25-78.35 zone. Note that the U.S. OIL FUND ETF (AMEX: USO) is not a pure play on Crude Oil. The longer-term trends for both remain Bullish.

The Energy stock sector underperformed 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 eased lower a day after making a new 28-year high. Price fell but Relative Strength versus the S&P 500 rose to a new high. The Gold Trust ETF (NYSE: GLD) confirmed the uptrend on 10/18/07. Some profit taking would be normal after gold’s sharp price run-up since 8/16/07, but these major trends remain Bullish.

Silver’s main trend is relatively 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 the metal steadily since 10/12/07. Profit taking seems normal after the previous price run-up.

Inflation expectations appear choppy and uncertain, especially since 6/22/07. This is based on the behavior of the ratio of two ETFs, TIP/IEF.

U.S. Treasury Bond prices rose sharply the past 3 trading days. The short-term trend still appears Bullish. Long-term, it seems possible that the iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT) ended a normal oversold bounce in a Bearish trend on 9/10/07. 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.

U.S. dollar broke down to another new low. The main trend has been confirmed Bearish—again and again. Longer term, the dollar fell 16% over the past 23 months, and the main tidal force remains very Bearish.

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

1.03% Canadian Dollar
0.98% 30Y T-Bond
0.71% Japanese Yen
0.16% British Pound
0.04% Swiss Franc
-0.06% Euro Index
-0.22% US Dollar Index
-0.22% Australian Dollar
-0.83% Hospitals
-1.03% Consumer Staples
-1.10% Health Care Products
-1.21% Health Care
-1.30% Drugs
-1.36% Health Care
-1.47% AMEX Composite
-1.53% Biotechs
-1.53% Italy
-1.68% Netherlands
-1.83% Hardware
-1.84% Spain
-1.86% Austria
-1.95% Gold Mining
-1.98% Japan
-2.04% Germany
-2.06% Belgium
-2.15% Chemicals
-2.18% Dow Transports
-2.18% Materials
-2.19% Switzerland
-2.21% Utilities
-2.23% Consumer Discretionary
-2.25% France
-2.28% Internet
-2.30% Dow Utilities
-2.37% S&P Mid Caps
-2.37% Technology
-2.38% Banks
-2.41% Computer Tech
-2.43% Dow Composite
-2.43% Paper
-2.49% DOT
-2.50% NYSE Composite
-2.51% S&P 100
-2.51% Airlines
-2.52% Wilshire 5000
-2.53% Russell 1000
-2.55% Retailers
-2.56% S&P 500
-2.58% Nasdaq 100
-2.58% Russell 3000
-2.58% Value Line
-2.61% Network
-2.64% Dow Industrial
-2.64% Canada
-2.65% Nasdaq Composite
-2.74% United Kingdom
-2.78% Industrial
-2.91% Malaysia
-2.95% Financial
-2.98% S&P Small Caps
-2.99% Oil
-3.05% Insurance
-3.14% Natural Gas
-3.18% Russell 2000
-3.28% Hong Kong
-3.31% Commodity Related
-3.51% Sweden
-3.59% REITs
-3.65% Taiwan
-3.70% Broker Dealers
-3.79% Mexico
-3.84% Australia
-3.85% South Korea
-4.30% Semiconductors
-4.33% Singapore
-4.50% Disk Drives
-4.74% Energy
-5.27% Brazil
-6.44% Oil Services