By Robert W. Colby, Senior Analyst TraderPlanet.com
Oversold bounce
Further upside recovery would be typical, given an absence of fresh fear-inducing news about the financial sector—although that remains a considerable risk for the Bulls.
On Friday, major stock price indices gapped higher on the open in response to an absence of the kind of overnight bad news that has been depressing sentiment in recent weeks. Prices continued to move upward most of the short session and closed near the highs of the day.Extremely light volume can be attributed to the half-day trading session after the Thanksgiving holiday. Next week, everyone will be back to work and volume should return to normal levels.
Breadth ended 56% net Bullish, with more Advancing stocks than Declining stocks on the NYSE.
Up-Down Volume finished the day 86% net Bullish, with greater Up Volume than Down Volume on the NYSE.
New Highs-New Lows on the NYSE ended at 72% net Bearish.
Bullish Price Divergences: Although the Dow Industrials and Transports both closed below their August lows in November, the following indices held above their August closing lows: DJUA, S&P 500, S&P 100, S&P 1500, NASDAQ Composite, NASDAQ 100, Russell 3000, Russell 1000, and Wilshire 5000.
Bad 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 scarce. 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
2.10% , DSG , Growth Small Cap DJ, DSG
1.47% , TMW , Wilshire 5000 ST TM, TMW
0.82% , RPG , Growth S&P 500, RPG
1.48% , PEJ , Leisure & Entertainment, PEJ
19.45% , CC , CIRCUIT CITY STR
0.92% , ELG , Growth Large Cap, ELG
1.54% , JKE , Growth LargeCap iS M, JKE
25.12% , ETFC.O , E*TRADE FINANCIAL
1.76% , VBK , Growth SmallCap VIPERs, VBK
1.27% , JKI , Value MidCap iS M, JKI
5.75% , SANM , SANMINA
2.35% , ADRD , Developed 100 BLDRS, ADRD
1.25% , JKH , MidCap Growth iS M, JKH
1.55% , IWP , Growth MidCap Russell, IWP
0.91% , IIH , Internet Infrastructure H, IIH
0.98% , PFM , Dividend Achievers PS, PFM
1.18% , VUG , Growth VIPERs, VUG
1.72% , EZA , South Africa Index, EZA
2.21% , IJR , SmallCap S&P 600, IJR
1.49% , IAH , Internet Architecture H, IAH
1.76% , VBR , Value SmallCap VIPERS, VBR
1.37% , IJK , Growth MidCap 400 B, IJK
1.67% , JKJ , SmallCap Core iS M, JKJ
1.23% , IJJ , Value MidCap S&P 400 B, IJJ
2.33% , WEN , WENDYS INTL
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
None. This can be attributed to the opening price gap higher and the low-volume half-day trading session.
Sectors: among the 9 major U.S. sectors, 8 rose and 1 fell.
Major Sectors Ranked for the Day
% Price Change, Sector
2.63% Energy
2.38% Financial
1.76% Consumer Discretionary
1.62% Health Care
1.49% Materials
1.33% Industrial
1.03% Consumer Staples
0.98% Technology
-0.10% Utilities
Looking beyond the daily fluctuation to the major trends (listed in order of long-term relative strength):
Energy (XLE) Bullish, Overweight. Relative Strength made new all-time high on 11/8/07. XLE made an all-time closing price high on 10/16/07. 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 11/21/07. 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 price made a new all-time high on 11/20/07, and Relative Strength made a new 2-year high on 11/21/07.
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) Neutral, Market Weight. The short-term turned down but the long-term trend is still up. 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 13-month high on 11/19/07.
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 11/20/07, price made a new 14-month low. Also on 11/21/07, the XLY/SPY Relative Strength ratio fell to its lowest level in 6 years on 11/20/07. Relative Strength has been trending down since 1/5/05.
Financial (XLF) Bearish, Underweight. XLF price hit another new 2-year low on 11/21/07, and the XLF/SPY Relative Strength ratio fell to its lowest level in more than 6 years on 11/20/07. Relative Strength has been trending down since 2/20/07.
Foreign stock indices sharply outperformed on Friday and are still relatively 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 outperformed since 11/12/07. 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 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 Cap Relative Strength fell steeply to new lows on 11/20/07 and price broke August low on 11/21/07. Small Caps substantially underperformed Large Caps since 4/19/06, and so the main long-term trend is Bearish for Small Caps.
January Crude Oil Futures rose to a new closing price high at 98.18. 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, confirms oil’s major uptrend.
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 rose sharply to recover more than 2/3 of their November loss. Gold showed rising upside momentum on Friday, and Gold’s main trend remains 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.
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 made a new 26-month price high on 11/23/07. The long-term, iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT) has been rising since 6/12/07. 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 formed a Japanese Candlestick Bullish Engulfing Line. The U.S. dollar appears to have lost downside momentum over the past 3 trading days and reversed to the upside on Friday, so some kind of relief rally could be possible. Previously, all rally attempts have been confined to only one day at a time over the past 7 weeks, indicating persistent selling pressure. Longer term, the dollar fell 19% from its high of 92.53 on 11/16/05 to its low of 74.65 on 11/23/07. There can be no doubt that the main trend has been Bearish.
Daily Rankings of Major Global Markets, Ranked from Strongest to Weakest of the Day:
4.08% Gold Mining
3.95% Broker Dealers
3.19% Belgium
3.18% Banks
2.94% Switzerland
2.86% Oil Services
2.86% Drugs
2.76% Hong Kong
2.71% United Kingdom
2.67% Retailers
2.67% France
2.63% Energy
2.47% Netherlands
2.43% Airlines
2.38% Financial
2.38% Taiwan
2.25% Japan
2.24% Singapore
2.23% Commodity Related
2.14% Italy
2.06% REITs
2.05% Canada
1.99% Russell 2000
1.98% AMEX Composite
1.95% S&P Small Caps
1.93% Dow Transports
1.89% NYSE Composite
1.84% Value Line
1.84% Health Care Products
1.78% Chemicals
1.77% Austria
1.76% Consumer Discretionary
1.69% S&P 500
1.69% Paper
1.68% Natural Gas
1.66% Russell 3000
1.65% Malaysia
1.63% S&P 100
1.63% Russell 1000
1.62% Health Care
1.61% Wilshire 5000
1.59% Hardware
1.53% Internet
1.52% Network
1.49% Materials
1.42% Dow Industrial
1.39% Semiconductors
1.36% Health Care
1.34% Nasdaq Composite
1.34% Dow Composite
1.33% Industrial
1.32% Insurance
1.31% S&P Mid Caps
1.31% Germany
1.28% South Korea
1.26% Oil
1.24% Mexico
1.23% Australia
1.19% Computer Tech
1.14% Disk Drives
1.12% Nasdaq 100
1.03% Consumer Staples
1.03% Brazil
0.99% Biotechs
0.98% Technology
0.93% DOT
0.86% Hospitals
0.51% Spain
0.36% Dow Utilities
0.34% Japanese Yen
0.32% 30Y T-Bond
0.29% Australian Dollar
0.26% Canadian Dollar
0.07% Swiss Franc
0.06% US Dollar Index
0.04% Sweden
-0.03% Euro Index
-0.10% Utilities
-0.10% British Pound
