By Robert W. Colby, Senior Analyst

Break Down. Break Up.

The CRB commodity price index jumped up to another new all-time price high, again confirming a major uptrend.

Materials Sector Stocks are Relatively Strong.

On Monday, major stock price indexes rose on news that Standard & Poor’s removed MBIA from CreditWatch and affirmed the ‘AAA’ financial strength rating of Ambac Financial. Key technical indicators closed above their highest intraday highs of the previous 13 trading days, suggesting a short-term uptrend–just one trading day after confirming a short-term downtrend. This market has something for everyone. Volume on the NYSE rose, thereby confirming the short-term uptrend.

The market certainly appears to be quite reactive to the news, rumors, and “reports” of the day. Many of these “reports” never pan out, but they do contribute to unpredictable volatility. In the longer-term picture, major underlying technical trends remain Bearish for stocks. In addition, most of the data seems to indicate that underlying fundamental trends may be deteriorating. There has been a sense that big problems are already baked into the cake, in the pipeline, and it is to late to do much about them. On the other hand, on some days at least, there still seems to be hope that somebody might come up with an effective solution to the ongoing financial crisis. The markets vacillate back and forth between these opposing points of view day to day, depending on the news and rumors of the day, which leak out bit by bit, seemingly at random. This makes for a high-risk environment for stock trading, both for longs and for shorts. You don’t know what will hit next.

Sectors: among the 9 major U.S. sectors, 8 rose and 1 ended unchanged .
Major Sectors Ranked for the Day
% Price Change Sector

2.86% Energy
2.30% Materials
1.33% Consumer Discretionary
1.29% Health Care
0.78% Industrial
0.58% Technology
0.14% Consumer Staples
0.10% Utilities
0.00% Financial

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

Energy (XLE) Neutral, Market Weight. On 2/20/08, the XLE/SPY Relative Strength Ratio rose to new all-time high, confirming a major uptrend.

Materials (XLB) Neutral, Market Weight. On 2/25/08, the XLB/SPY Relative Strength Ratio rose to a new all-time high, confirming a major uptrend.

Consumer Staples (XLP) Neutral, Market Weight. On 1/17/08, the XLP/SPY Relative Strength Ratio rose to new 3-year high, confirming a major uptrend.

Industrial (XLI) Neutral, Market Weight. On 2/13/08, the XLI/SPY Relative Strength Ratio made a new all-time high, confirming a major uptrend.

Utilities (XLU) Neutral, Market Weight. On 1/9/08, the XLU/SPY Relative Strength Ratio rose to new all-time high, confirming a major uptrend.

Health Care (XLV) Neutral, Market Weight. On 1/17/08, the XLV/SPY Relative Strength Ratio rose to new 2-year high, confirming a significant uptrend.

Consumer Discretionary (XLY) Bearish, Underweight. On 2/21/08, the XLY/SPY Relative Strength Ratio fell to a new 3-week low, suggesting short-term weakness. On 1/11/08, the XLY/SPY Relative Strength Ratio fell to a new 6-year low, confirming a major downtrend.

Technology (XLK) Bearish, Underweight. On 2/22/08, the XLK/SPY Relative Strength Ratio fell to a new 8-month low, confirming a significant downtrend.

Financial (XLF) Bearish, Underweight. On 1/8/08, the XLF/SPY Relative Strength Ratio fell to a new 7-year low, confirming a major downtrend.

Foreign stock indexes turned up in recent days but remain in downtrends. Relative Strength of EFA/SPY fell to a new 13-month low on 2/8/08. EFA price fell to a new 17-month low on 1/23/08. The EFA (the EAFE, international developed country stock markets, ex the U.S. and Canada) underperformed since 11/27/07.

NASDAQ Composite price remains Bearish. On 2/19/08, Relative Strength fell to a new 8-month low, confirming a significant downtrend.

Growth Stock/Value Stock Relative Strength Ratio made a new 3-month low on 2/1/08 and has underperformed since the peak on 11/7/07. The Growth/Value ratio (IWF/IWD) appears to be in an intermediate-term correction phase.

The Small Cap/Large Cap Relative Strength Ratio broke down to a new 2.5-year low on 1/11/07. It has been trending down since 4/19/06. The main long-term trend is Relatively Bearish for Small Caps.

Crude Oil may be finding resistance just above 100. On 2/20/08, the April futures contract price hit 100.86 intraday but closed at 99.70. Although the major trend is up, big round numbers such as 100 sometimes function as resistance. 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 underperformed Crude Oil since 12/10/07.

Gold (April futures contract) eased moderately lower. Just last week, Gold confirmed that it’s main trend remains Bullish.

Silver’s main trend is Bearish compared to Gold. The iShares Silver Trust (AMEX: SLV) has outperformed Gold slightly since 12/14/07. But that is nothing compared to the long-term trend. Silver has been relatively weak compared to Gold since 12/7/06. In addition, for the past 28 years, since 1/2/80, Silver has underperformed Gold. So long term, Silver is tarnished.

The Gold Miners ETF (GDX) has underperformed Gold futures significantly since 10/31/07. GDX is Bearish relative to Gold itself.

U.S. Treasury Bond prices fell sharply. Bonds generally have been 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 remains in a short-term downtrend. The intermediate-term trend since late November appears choppy and sideways. November and January price lows at 74.50 and 74.66 might be watched for potential support. The main long-term trend remains Bearish.

The Art of Contrary Thinking: The mood has been moving toward pessimism as stock prices moved lower. But sentiment is not yet at a level associated with extreme pessimism. So, crowd psychology could get more Bearish before it is over. 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 rose last week. According to the weekly Investors Intelligence newsletter survey as of 2/22/08, there were 41.6% Bulls and 33.7% Bears. The ratio of Bullish advisors to Bearish advisors rose to 1.23, up from 1.03 to 1 the previous week. Still, this is below its 38-year median at 1.47 to 1. The ratio’s 38-year range is 0.28 to 17.51.

VIX “Fear Index”, now at 23.03, is relatively normal by Bear Market standards (around 20 to 40) but relatively high by Bull Market standards (around 10 to 20). 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 26.67, is relatively low by Bear Market standards (around 35 to 80) but relatively high by Bull Market standards (around 12 to 26). 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 is 0.84, which indicates moderately Bearish sentiment. Its 4-year simple moving average and median are 0.62, and its 4- year range is 0.35 to 1.28.

ISEE Call/Put Ratio is 1.13, which indicates Bearish 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 has derailed that engine. Economic statistics and corporate earnings have been weakening.

The Primary Tide Major Trend turned Bearish, and that is a strong force. The Dow Theory confirmed a Primary Bear Market on 11/21/07 when both the Dow-Jones Industrial Average and the Dow-Jones Transportation Average closed below their respective closing price lows of August, 2007. On 11/7/07, the Transports closed below their 8/16/07 closing price low of 4,671.88. Then on 11/21/07, the Dow-Jones Industrial Average closed below its 8/16/07 closing price low of 12,845.78, thereby turning the Primary Tide Bearish.

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

3.59% Taiwan
3.25% Natural Gas
3.21% REITs
3.19% Biotechs
3.18% Australia
2.94% Chemicals
2.86% Energy
2.63% Disk Drives
2.53% Paper
2.50% Canada
2.30% Materials
2.30% Oil Services
2.27% Oil
2.26% Network
2.24% Health Care Products
2.19% Commodity Related
2.18% Retailers
2.16% Russell 2000
2.09% S&P Small Caps
2.08% Belgium
2.08% Japan
2.06% Singapore
2.03% S&P Mid Caps
2.01% Hardware
1.94% South Korea
1.84% Broker Dealers
1.83% Value Line
1.81% Mexico
1.78% United Kingdom
1.73% Netherlands
1.73% Canadian Dollar
1.71% France
1.69% Dow Transports
1.64% Sweden
1.60% NYSE Composite
1.60% Switzerland
1.56% Health Care
1.53% Dow Industrial
1.50% Russell 3000
1.49% Wilshire 5000
1.46% Drugs
1.45% Russell 1000
1.40% Dow Composite
1.39% Insurance
1.38% S&P 500
1.33% Consumer Discretionary
1.33% Semiconductors
1.29% Health Care
1.29% Italy
1.28% DOT
1.27% AMEX Composite
1.22% Spain
1.18% S&P 100
1.16% Austria
1.05% Nasdaq Composite
1.00% Germany
0.78% Industrial
0.78% Banks
0.72% Brazil
0.71% Internet
0.70% Hong Kong
0.68% Nasdaq 100
0.68% Airlines
0.65% Dow Utilities
0.65% CRB
0.59% Hospitals
0.58% Technology
0.55% Crude Oil
0.41% Computer Tech
0.38% Australian Dollar
0.31% Malaysia
0.22% Gold Mining
0.14% Consumer Staples
0.10% Utilities
0.00% Financial
-0.02% US Dollar Index
-0.02% Euro Index
-0.05% British Pound
-0.44% Swiss Franc
-0.80% Gold
-1.16% Japanese Yen
-1.83% 30Y T-Bond