By Robert W. Colby, Senior Analyst TraderPlanet.com
Financials catch a rare break…but will it last?
The Financial stock sector, which had been dragging the whole market down, got a lift on news that that Abu Dhabi Investment Authority would invest $7.5 billion for a 4.9% stake in Citigroup. The previous day, on 11/26/07, XLF price hit a new 2.5-year low, and the XLF/SPY Relative Strength ratio fell to its lowest level in more than 7 years. The pundits have been predicting that the problems for the financial sector might get worse before they get better–but, of course, the pundits are not always right.
Nevertheless, news, stories, and rumors about the subprime credit crunch hitting the financial sector may continue to offer considerable risks for the stock market.
On Tuesday, major stock price indices opened higher but soon turned choppy. Prices traded under the open a few times until a rally in the last half hour finished the day with good gains. Prices closed near the highs of the day.Tuesday was an Inside Day, with the high-low range for the day entirely contained within the previous day’s range. Inside Days are more often than not consolidation days, as opposed to reversal days, and the preexisting trend continues thereafter.
Volume rebounded upward from the slow pace of trading around the Thanksgiving holiday. Rising volume with rising prices tends to be Bullish, other things being equal, which is not clear in this case.
On Monday, the S&P 500 cash index closed just 0.52 above Potential Support at 1,406.70, which was the closing price low of 8/15/2007. The S&P 500 appeared to be at a critical level, and on Tuesday it appeared to have passed that initial test. It seems possible that there could be further testing before it is over.
Breadth ended 33% net Bullish, with more Advancing stocks than Declining stocks on the NYSE.
Up-Down Volume finished the day 43% net Bullish, with greater Up Volume than Down Volume on the NYSE.
New Highs-New Lows on the NYSE ended at 87% 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, 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
13.79% , ATVI , Activision Inc.
1.77% , XSD , Semiconductor SPDR, XSD
1.74% , ELV , Value Large Cap DJ, ELV
2.13% , IGW , Semiconductor iS GS, IGW
10.58% , SPLS , STAPLES
10.75% , THC , TENET HEALTHCARE
6.78% , RF , REGIONS FINAN
1.24% , ISI , LargeCap Blend S&P 1500 iS, ISI
3.80% , EWS , Singapore Index, EWS
2.45% , IYG , Financial Services DJ, IYG
3.20% , R , RYDER SYSTEM
1.40% , PWY , Value SmallCap Dynamic PS, PWY
4.46% , EZA , South Africa Index, EZA
1.18% , DSV , Value Small Cap DJ, DSV
3.99% , TAP , ADOLPH COORS STK B, TAP
3.84% , MYL , MYLAN LABS
5.67% , SNDK , SanDisk Corporation
3.60% , MLNM , Millennium Pharmaceuticals Inc
1.15% , KLD , LargeCap Blend Socially Responsible iS, KLD
6.16% , GILD , Gilead Sciences Inc
3.63% , TIF , TIFFANY
4.65% , ESRX , EXPRESS SCRIPTS
4.13% , MRVL , MARVELL TECHNOLOGY
1.62% , NY , Value LargeCap NYSE 100 iS, NY
1.19% , IWV , LargeCap Blend Russell 3000, IWV
3.87% , GENZ , GENZYME GEN
2.86% , MVV , Ultra MidCap400 Double, MVV
1.33% , IOO , Global 100, IOO
2.64% , RKH , Bank Regional H, RKH
4.42% , BEAS , BEA Systems Inc
2.09% , KCE , Capital Markets KWB ST, KCE
7.90% , APOL , APOLLO GROUP
1.62% , MTK , Technology MS sT, MTK
3.11% , ACS , AFFILIATED COMPUTER
4.55% , SANM , SANMINA
5.52% , LVLT , LEVEL 3 COMMUNICATIONS
4.31% , FITB , FIFTH THIRD BANC
3.68% , BSX , BOSTON SCIENT
1.72% , IYH , Healthcare DJ, IYH
4.53% , ASD , AMER STANDARD
3.06% , ABT , ABBOTT LABS
2.32% , WM , WASHINGTON MUT
6.12% , BF.B , BROWN FORMAN STK B
4.82% , BSC , BEAR STEARNS
4.08% , SAF , SAFECO
3.92% , PFG , PRINCIPAL FINL
2.80% , BBH , Biotech H, BBH
2.69% , IYF , Financial DJ US, IYF
3.86% , MS , MORGAN STANLEY
3.59% , MER , MERRILL LYNCH
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-2.02% , PXE , Energy Exploration & Prod, PXE
-9.28% , ABK , AMBAC FINL GRP
-7.86% , MBI , MBIA
-4.72% , TRB , TRIBUNE
-2.87% , MZZ , Short 200% MidCap 400 PS, MZZ
-3.20% , VLO , VALERO ENERGY
-0.41% , RFG , Growth MidCap S&P 400, RFG
-3.50% , MTG , MGIC INVESTMENT
-2.46% , BIG , BIG LOTS
-3.04% , DXD , Short 200% Dow 30 PS, DXD
-2.09% , HAL , HALLIBURTON
-2.32% , SUN , SUNOCO
-2.56% , USO , Oil, Crude, U.S. Oil Fund, USO
-2.69% , APC , ANADARKO PETRO
-1.31% , NCC , NATIONAL CITY
-1.55% , DOG , Short 100% Dow 30, DOG
-2.35% , WAG , WALGREEN
-1.23% , S , SPRINT NEXTEL
-2.85% , SDS , Short 200% S&P 500 PS, SDS
-1.94% , RDC , ROWAN COMPANIES
-1.43% , SH , Short 100% S&P 500, SH
-0.97% , MYY , Short 100% MidCap 400, MYY
-1.21% , LXK , LEXMARK INTL STK A
-1.81% , LNCR , Lincare Holdings Inc
-3.16% , QID , Short 200% QQQ PS, QID
-3.01% , UIS , UNISYS
-1.53% , SLB , SCHLUMBERGER
-0.86% , LQD , Bond, Corp, LQD
-1.24% , C , CITIGROUP
-2.33% , CAR , Avis Budget Group, Inc. (CAR)
-1.81% , XTO , XTO ENERGY INC
-3.72% , KBH , KB HOME
-1.05% , ABC , AMERISOURCEBERGN
-1.17% , MCO , MOODYS CORP
-1.35% , PSQ , Short 100% QQQ, PSQ
-2.08% , APA , APACHE
-1.36% , DLX , DELUXE
-2.87% , HES , AMERADA HESS
-1.17% , AMD , ADV MICRO DEV
-0.41% , AGG , Bond, Aggregate, AGG
-1.19% , DVN , DEVON ENERGY
-1.29% , IAU , Gold COMEX iS, IAU
-0.87% , PHM , PULTE HOMES
-1.34% , BHI , BAKER HUGHES
-0.83% , COP , CONOCOPHILLIPS
-1.88% , PXJ , Oil & Gas, PXJ
-0.53% , RHI , ROBERT HALF
-0.98% , PNW , PINNACLE WEST
-1.24% , HD , HOME DEPOT
-1.08% , OXY , OCCIDENTAL
Sectors: among the 9 major U.S. sectors, 8 rose and 1 fell.
Major Sectors Ranked for the Day
% Price Change, Sector
2.00% Industrial
1.80% Financial
1.59% Consumer Discretionary
1.29% Health Care
1.11% Technology
1.06% Consumer Staples
0.80% Materials
0.38% Utilities
-1.11% Energy
Looking beyond the daily fluctuation to the major trends (listed in order of long-term relative strength):
Utilities (XLU) Bullish, Overweight. This defensive sector’s Relative Strength made a new 6-year high on 11/26/07. 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 6-year high on 11/26/07.
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.
Health Care (XLV) Bullish, Overweight. This defensive sector’s Relative Strength moved up to a new 13-month high on 11/27/07.
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.
Industrial (XLI) Neutral, Market Weight. Price and Relative Strength have been chopping sideways over the past 4 months. Longer-term trends appear Bullish.
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.
Consumer Discretionary (XLY) Bearish, Underweight. On 11/27/07, price made a new 14-month low. On 11/21/07, 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 2.5-year low on 11/26/07, and the XLF/SPY Relative Strength ratio fell to its lowest level in more than 7 years on 11/26/07. Relative Strength has been trending down since 2/20/07.
Foreign stock indices made a new high in Relative Strength. 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 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 in a rising trend 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 to new lows on 11/26/07 and price broke its 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 broke previous 3-day lows and fell 3.34% to 94.44. On 11/26/07, Crude Oil reversed at 99.11—just below the round number of 100. Crude Oil may have entered a correction. 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) is not a pure play on Crude Oil, although it generally moves in the same direction.
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 nearly 2%. Gold appears uncertain for the short term, but 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 fell moderately a day after making a new 28-month price high on 11/26/07. 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 may be trying to stabilize. The U.S. dollar appears to be losing downside momentum over the past 5 trading days, but the main trend is still down. 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:
3.86% South Korea
3.80% Singapore
3.62% Hong Kong
3.31% Broker Dealers
3.22% Malaysia
2.89% Netherlands
2.79% Belgium
2.60% Banks
2.48% Brazil
2.28% Internet
2.23% Nasdaq 100
2.21% Switzerland
2.20% Biotechs
2.19% REITs
2.14% Health Care
2.11% Health Care Products
2.04% Semiconductors
2.00% Industrial
1.93% Mexico
1.90% DOT
1.88% Dow Transports
1.86% Drugs
1.83% Australia
1.80% Financial
1.79% Retailers
1.69% Dow Industrial
1.61% Japan
1.59% Consumer Discretionary
1.59% Taiwan
1.57% Nasdaq Composite
1.56% S&P 100
1.54% Spain
1.52% Italy
1.51% Dow Composite
1.49% S&P 500
1.47% United Kingdom
1.43% Chemicals
1.42% Russell 1000
1.41% NYSE Composite
1.39% Russell 3000
1.37% Airlines
1.34% Wilshire 5000
1.34% Austria
1.33% Hospitals
1.33% France
1.29% Health Care
1.28% Computer Tech
1.26% Germany
1.24% Insurance
1.18% Hardware
1.15% Disk Drives
1.12% Russell 2000
1.11% Technology
1.10% S&P Mid Caps
1.06% Consumer Staples
1.04% Value Line
1.04% Network
0.87% S&P Small Caps
0.80% Materials
0.72% Sweden
0.62% Dow Utilities
0.40% US Dollar Index
0.38% Utilities
0.26% Paper
-0.10% Australian Dollar
-0.17% British Pound
-0.18% Euro Index
-0.22% Commodity Related
-0.32% Gold Mining
-0.46% Swiss Franc
-0.53% Japanese Yen
-0.76% Oil
-0.77% Natural Gas
-1.05% 30Y T-Bond
-1.11% Energy
-1.14% Canadian Dollar
-1.50% AMEX Composite
-1.60% Canada
-1.63% Oil Services
