By Robert W. Colby, Senior Analyst TraderPlanet.com
Impressive resilience in the face of extreme bad news and pessimism.
Sentiment shows extreme pessimism on the part of options traders.
Tangible indications of fear have been evident.
Further upside recovery attempts seem possible, to correct the current oversold condition.
Breadth ended 9% net Bearish, with more Declining stocks than Advancing stocks on the NYSE.
New Highs-New Lows on the NYSE ended at 82% net Bearish.
Sentiment/Contrary Opinion: Bullish Opinion Fell to its 5-year median. According to the weekly Investors Intelligence newsletter survey as of 11/14/07, there were 51.1% Bulls and 26.7% Bears. The ratio of Bullish advisors to Bearish advisors fell to 2.25 to 1 (which happens to be its 5-year median), down from 2.46 to 1 the previous week and a peak of 3.21 to 1 as of 10/17/07.
VIX “Fear Index” rose to a 4-year closing high on 11/12/07, when VIX closed at 31.09, which was 3 standard deviations above its 1-year mean. This indicated that options traders were feeling extremely Bearish. 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” also rose to a 4-year closing high on 11/12/07, when VXN closed at 34.94, which was more than 4 standard deviations above its 1-year mean. VXN measures Nasdaq Volatility using a method comparable to that used for VIX.
CBOE Put/Call Ratio at 0.98 showed substantial Bearishness. On 11/16/07, the CBOE Equity Put/Call Ratio (http://www.cboe.com/data/PutCallRatio.aspx) was more than 2.5 standard deviations above its 1-year mean.
ISEE Call/Put Ratio at 0.68 showed extreme Bearishness. On 11/16/07, the ISEE Call/Put Ratio was more than 3 standard deviations below its 1-year mean. Such low numbers indicate that customers opened many fewer long call options and many more long put options than they normally do.
News: The business and financial news has taken a turn toward the extreme Bearish side in recent weeks, mainly due to worries about housing and credit and the impact on the economy. But keep in mind that the stock market is a leading economic indicator and the news is a lagging indicator. Stock prices typically discount the future many months ahead. Therefore, the current news usually arrives too late to be of much actual use to investors.
The Art of Contrary Thinking: “Traders see the situation in the financial world getting extensively worse before it gets better …”, according one typical published interpretation. “We have not seen a nationwide decline in housing like this since the Great Depression,” said John Stumpf, CEO of Wells Fargo. Optimistic reports are nowhere to be found. The media appears to be more than willing to give big play to anything pessimistic. These are the kinds of stories typically seen at or near market bottoms.
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
16.08% , GRMN , GARMIN LTD
13.12% , LVLT , LEVEL 3 COMMUNICATIONS
8.96% , A , AGILENT TECH
6.79% , PWER , POWER ONE
8.58% , VRSN , VeriSign Inc
5.51% , YHOO , YAHOO
3.12% , AVP , AVON
1.21% , PEJ , Leisure & Entertainment, PEJ
0.31% , XBI , Biotech SPDR, XBI
3.45% , INTU , INTUIT
6.12% , AFL , AFLAC
3.22% , BF.B , BROWN FORMAN STK B
2.27% , PHW , Hardware & Electronics, PHW
0.50% , ADRD , Developed 100 BLDRS, ADRD
1.11% , VOX , Telecom Services VIPERs, VOX
1.29% , EZA , South Africa Index, EZA
3.36% , ADBE , ADOBE SYS
5.72% , MRO , MARATHON OIL
3.78% , HPQ , HEWLETT PACKARD
0.83% , FPX , IPOs, First Tr IPOX-100, FPX
0.65% , PXQ , Networking, PXQ
0.57% , XLG , LargeCap Rydex Rus Top 50, XLG
0.93% , VDC , Consumer Staples VIPERs, VDC
2.94% , WAT , WATERS
2.14% , NOV , NATIONAL OILWELL VARC0
0.37% , AT , ALLTEL
3.36% , TBH , Telebras HOLDRS, TBH*
1.97% , SRE , SEMPRA ENERGY
4.30% , APOL , APOLLO GROUP
1.09% , IYZ , Telecom DJ US, IYZ
2.41% , MMM , 3M
2.32% , ADM , ARCHER DANIELS
2.23% , HSP , HOSPIRA
3.47% , KR , KROGER
4.43% , RIMM , RESEARCH IN MOTION LTD
1.88% , SWH , Software H, SWH
2.69% , BMC , BMC SOFTWARE
2.32% , BK , BANK OF NEW YORK
0.79% , EWG , Germany Index, EWG
4.03% , SUN , SUNOCO
2.27% , GILD , Gilead Sciences Inc
1.62% , OMC , OMNICOM
1.98% , GD , GENERAL DYNAMICS
1.03% , EWO , Austria Index, EWO
1.66% , MCD , MCDONALDS
0.20% , PSJ , Software, PSJ
1.89% , PG , PROCTER & GAMBLE
1.22% , EWA , Australia Index, EWA
1.16% , CL , COLGATE
0.40% , VTI , Blend Total Market VIPERs, VTI
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-0.40% , PIC , Insurance, PIC
-8.27% , HBAN , HUNTINGTON
-4.51% , FDX , FEDEX
-3.86% , SBUX , STARBUCKS
-4.75% , XL , XL CAPITAL STK A
-2.57% , EK , EASTMAN KODAK
-3.43% , BSX , BOSTON SCIENT
-5.46% , FNM , FANNIE MAE
-2.13% , CCU , CLEAR CHANNEL
-2.72% , FRE , FREDDIE MAC
-3.92% , NOVL , NOVELL
-8.79% , VC , VISTEON
-4.50% , R , RYDER SYSTEM
-1.26% , PCAR , PACCAR
-3.74% , SNV , SYNOVUS
-2.21% , ADSK , AUTODESK
-3.96% , PGR , PROGRESSIVE OHIO
-2.38% , WEN , WENDYS INTL
-2.42% , KBH , KB HOME
-2.80% , ATVI , Activision Inc.
-2.11% , TXT , TEXTRON
-4.90% , SOV , SOVEREIGN BANC
-2.30% , FAST , Fastenal Company
-2.62% , PH , PARKER HANNIFIN
-2.24% , HON , HONEYWELL INTL
-1.60% , NOC , NORTHROP GRUMMAN
-1.96% , AMP , Ameriprise Financial Inc.
-1.49% , UPS , UNITED PARCEL STK B
-1.18% , RZV , Value SmallCap S&P 600, RZV
-1.72% , XHB , Homebuilders SPDR, XHB
-1.34% , SYK , STRYKER
-2.62% , CMA , COMERICA
-2.45% , SSCC , Smurfit-Stone Container Corporation
-2.78% , XMSR , XM Satellite R
-2.89% , GM , GENERAL MOTORS
-3.75% , LEN , Lennar Corp. (LEN)
-1.50% , TMK , TORCHMARK
-2.28% , DLX , DELUXE
-2.55% , SPG , SIMON PROP GRP
-2.00% , AIV , APT INV MNGMT
-0.46% , IJT , Growth BARRA Small Cap 600, IJT
-2.69% , BIG , BIG LOTS
-0.82% , AM , AMER GREETINGS STK A
-4.22% , FHN , FIRST TENNESSEE
-1.68% , EMN , EASTMAN CHEM
-1.04% , MDT , MEDTRONIC
-1.33% , LIZ , LIZ CLAIRBORNE
-1.51% , TIN , TEMPLE INLAND
-1.62% , HOG , HARLEY DAVIDSON
-2.04% , AZO , AUTOZONE
Sectors: among the 9 major U.S. sectors, 6 rose and 3 fell.
Major Sectors Ranked for the Day
% Price Change, Sector
0.46% Consumer Staples
0.45% Health Care
-0.03% Consumer Discretionary
Utilities (XLU) Bullish, Overweight. This defensive sector’s Relative Strength made a new 6-year high on 11/9/07. Price made a new 5-month high on 10/31/07. Utilities have improved significantly since their Relative Strength low on 9/28/07.
Consumer Staples (XLP) Bullish, Overweight. This defensive sector’s Relative Strength made a new 14-month high on 11/16/07.
Technology (XLK) Bullish, Overweight. XLK hit a new 6-year price high on 11/1/07, and Relative Strength made a new 3-year high on 11/5/07. Long term, XLK has been relatively strong compared to the S&P since its low on 7/24/06.
Materials (XLB) Bullish, Overweight. Relative Strength made 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.
Health Care (XLV) Neutral, Market Weight. This defensive sector’s Relative Strength moved up to a new 7-month high on 11/16/07.
Industrial (XLI) Neutral, Market Weight. Price and Relative Strength have been chopping sideways over the past 4 months. Longer-term trends appear Bullish.
Consumer Discretionary (XLY) Bearish, Underweight. On 11/12/07, price made a new 13-month low. On 11/14/07, the XLY/SPY Relative Strength ratio fell to its lowest level in 6 years. Relative Strength has been trending down since 1/5/05.
Financial (XLF) Bearish, Underweight. XLF price hit another new 2-year low on 11/8/07, and the XLF/SPY Relative Strength ratio fell to its lowest level in more than 6 years on 11/7/07. Relative Strength has been trending down since 2/20/07.
Foreign stock indices underperformed short term, since 11/8/07, but are still strong long term. 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 11/8/07. 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 nearly all Foreign for many months.
NASDAQ Composite and NASDAQ 100 underperformed since 11/7/07. It appears to be nothing more than a short-term correction. 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 rising since 11/12/07. The ratio made a new high on 11/7/07. The long-term, the main trend for the Growth/Value ratio (IWF/IWD) has been rising since 8/8/06.
Small Caps fell steeply and substantially underperformed Large Caps since 4/19/06, and so the main long-term trend is Bearish for Small Caps.
December Crude Oil Futures turned up on Friday but were down for the week. Oil has been in a rising main trend since 1/18/07. Support appears at previous lows of 90.13 and 88.92, at previous resistance at 84.10, and at previous minor lows in the 78.25-78.35 zone. The U.S. OIL FUND ETF (AMEX: USO), which is not a pure play on Crude Oil, confirmed the action of oil futures.
The Energy stock sector has been lagging oil the commodity over the past 5 months. XLE has underperformed the USO since 5/30/07.
December Gold Futures fell again after entering into a correction on 11/7/07. Gold had been extended, so a correction seems normal.
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.
Inflation expectations have been rising since 1/16/07 and made a new 14-month high on 11/12/07. The main trend is still up, based on the behavior of the ratio of two ETFs, TIP/IEF.
U.S. Treasury Bonds prices have been rising since 6/12/07. The long-term, iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT) made a new 22-month price high on 11/16/07. 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 turned down again on Friday. Still, it managed a gain for the week as a whole. This market has been under steady pressure, with all rally attempts confined to only one day over the past 6 weeks. The main trend has been confirmed Bearish—again and again. Longer term, the dollar fell 19% from its high of 92.53 on 11/16/05, and the main tidal force remains very Bearish.
2.22% Oil Services
1.70% Commodity Related
1.58% Gold Mining
1.38% Computer Tech
1.21% Nasdaq 100
1.17% Natural Gas
1.05% AMEX Composite
1.01% Canadian Dollar
0.72% Nasdaq Composite
0.65% Health Care
0.59% S&P 100
0.58% Swiss Franc
0.56% United Kingdom
0.52% S&P 500
0.51% NYSE Composite
0.51% Dow Industrial
0.49% Russell 1000
0.48% Dow Utilities
0.46% Consumer Staples
0.46% Australian Dollar
0.45% Health Care
0.44% South Korea
0.43% Russell 3000
0.43% Wilshire 5000
0.36% British Pound
0.33% Euro Index
0.14% 30Y T-Bond
0.12% Disk Drives
-0.02% Health Care Products
-0.03% Consumer Discretionary
-0.12% Dow Composite
-0.12% Japanese Yen
-0.14% Value Line
-0.20% S&P Mid Caps
-0.23% US Dollar Index
-0.27% Russell 2000
-0.38% S&P Small Caps
-0.86% Broker Dealers
-0.92% Hong Kong
-1.61% Dow Transports