By Robert W. Colby, Senior Analyst

Stock Market: Extreme Selling.
The Economy: Falling Hard.

Volume on the NYSE rose 23% as stock prices fell.

Downside/Upside Volume was extreme at 11.74 to 1.

Sentiment turned more Bearish.

On Tuesday, major stock price indexes gapped lower on the open in reaction to news that the Institute for Supply Management nonmanufacturing index fell to 41.9% in January, down from 54.4% in December. This was far below consensus expectations, was the first reading below the 50% March 2003, was the largest one-month drop in the index’s history, and was the second-lowest reading ever. It heightened fears that the U.S. economy has entered a recession.

Stock Prices were choppy with a downward bias all day and closed near the lows of the day. In the final hour, a CNBC commentator reported that there are several bond insurer bailout efforts underway, but even that could not stem the selling for more than a few minutes.

Volume on the NYSE rose 23%, indicating increasing selling pressure on stocks. The ratio of the volume of declining stocks to the volume of advancing stocks was extreme at 11.74 to 1.

The market seems to be quite reactive to the news of the day. In the longer-term picture, major underlying technical trends remain Bearish for stocks. In addition, underlying fundamental trends appear to be deteriorating. There has been a sense that big problems are already baked into the cake, in the pipeline. Therefore, it appears to be a high-risk environment—especially for longs.

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

10.31% , WHR , WHIRLPOOL
7.08% , WYNN , Wynn Resorts L
5.00% , AVP , AVON
5.31% , DXD , Short 200% Dow 30 PS, DXD
2.44% , SH , Short 100% S&P 500, SH
1.74% , KSU , Kansas City Southern, KSU
4.29% , RFMD , RF Micro Devices Inc
4.40% , QID , Short 200% QQQ PS, QID
1.32% , AES , AES
5.37% , SDS , Short 200% S&P 500 PS, SDS
5.32% , MZZ , Short 200% MidCap 400 PS, MZZ
2.17% , DOG , Short 100% Dow 30, DOG
0.48% , TIP , Bond, TIPS, TIP
2.97% , MYY , Short 100% MidCap 400, MYY
0.62% , DGX , QUEST DIAG
0.76% , TLT , Bond, 20+ Years Treasury, TLT
0.23% , SHY , Bond, 1-3 Year Treasury, SHY
0.31% , AGG , Bond, Aggregate, AGG
0.38% , MU , MICRON TECH
0.35% , LQD , Bond, Corp, LQD
0.25% , CL , COLGATE
0.15% , NOVL , NOVELL

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

-3.58% , BDH , Broadband H, BDH
-8.44% , GRMN , GARMIN LTD
-2.91% , IYJ , Industrial LargeCap Blend DJ US, IYJ
-2.92% , IYY , LargeCap Blend Total Market DJ, IYY
-5.33% , EWN , Netherlands Index, EWN
-8.81% , FLR , FLUOR
-3.49% , NYC , LargeCap Blend NYSE Composite iS, NYC
-10.14% , FMCN , Focus Media, FMCN
-3.20% , FDV , Value 40 Large Low P/E FT DB, FDV
-4.73% , EWL , Switzerland Index, EWL
-7.43% , NIHD , NII Holdings, Inc.
-5.42% , MVV , Ultra MidCap400 Double, MVV
-3.80% , IYM , Basic Materials DJ US, IYM
-4.49% , FEU , Value LargeCap Euro STOXX 50 DJ, FEU
-3.78% , SWH , Software H, SWH
-5.43% , SUN , SUNOCO
-4.30% , TTH , Telecom H, TTH
-2.95% , ISI , LargeCap Blend S&P 1500 iS, ISI
-4.06% , IOO , Global 100, IOO
-5.64% , EZU , EMU Europe Index, EZU
-3.33% , RWR , REIT Wilshire, RWR
-2.70% , PMR , Retail, PMR
-4.63% , ADRU , Europe 100 BLDRS, ADRU
-2.98% , MTK , Technology MS sT, MTK
-8.96% , AMD , ADV MICRO DEV
-3.03% , IDU , Utilities DJ, IDU
-2.69% , IJT , Growth BARRA Small Cap 600, IJT
-3.20% , JKK , Growth SmallCap iS M, JKK
-5.44% , DISCA , Discovery Holding Co.
-5.39% , ADRE , Emerging 50 BLDRS, ADRE
-2.80% , OEF , LargeCap Blend S&P 100, OEF
-4.57% , DDM , Ultra Dow30 Double, DDM
-6.49% , PCAR , PACCAR
-4.65% , ORCL , ORACLE
-2.57% , XME , Metals & Mining SPDR, XME
-5.01% , IEV , Europe 350 S&P Index, IEV
-5.25% , EWG , Germany Index, EWG
-4.89% , SLM , SLM CORP
-6.91% , FXI , China 25 iS, FXI

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

-1.36% Consumer Staples
-1.82% Health Care
-2.50% Technology
-2.54% Industrial
-2.81% Consumer Discretionary
-2.88% Materials
-3.01% Utilities
-4.06% Financial
-4.13% Energy

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

Materials (XLB) Bullish, Overweight. Price touched a new 5-month low on 1/23/08. The XLB/SPY Relative Strength Ratio made a new all-time high on 2/1/08. The long-term Relative Strength trend has strongly outperformed since 9/27/2000.

Utilities (XLU) Neutral, Market Weight. Price touched a new 12-month low on 1/22/08. Relative Strength made a new all-time high on 1/9/08, and Price made a new all-time high on 12/10/07.

Energy (XLE) Neutral, Market Weight. Price hit a new 5-month low on 1/22/08. On 1/3/08, both XLE Price and Relative Strength made new all-time highs. XLE has been strong compared to the S&P since 3/12/03.

Consumer Staples (XLP) Neutral, Market Weight. Price touched a new 15-month low on 1/22/08. Price made a new all-time high on 12/10/07, and Relative Strength made a new 3-year high on 1/17/08.

Industrial (XLI) Neutral, Market Weight. Price touched a new 16-month low on 1/22/08. On 1/30/08, Relative Strength made a new all-time high.

Health Care (XLV) Neutral, Market Weight. Price touched a new 18-month low on 1/22/08. Relative Strength moved up to a new 26-month high on 1/17/08.

Technology (XLK) Neutral, Market Weight. Price touched a new 17-month low on 1/22/08. On 2/4/08, Relative Strength made a new 7-month low. XLK/SPY has underperformed since 11/5/07.

Consumer Discretionary (XLY) Bearish, Underweight. Price touched a new 4-year low on 1/22/08. On 1/11/08, the XLY/SPY Relative Strength Ratio fell to its lowest level in 6 years.

Financial (XLF) Bearish, Underweight. Price touched a new 4-year low on 1/22/08. On 1/8/08, Relative Strength fell to a new 7-year low. These confirmed a Bearish major trend.

Foreign stock indexes remain in downtrends. 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. Previously, EFA outperformed from 2002 to 11/27/07.

NASDAQ Composite price touched a new 15-month low on 1/23/08. Relative Strength underperformed the S&P since 11/7/07.

Growth Stock/Value Stock Relative Strength Ratio made a new 3-month low 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 Futures broke down below previous 7-day lows. This confirms that the short-term trend is down. Oil could test support near December’s low at 85.37. Resistance is evident at recent highs at 92.71 and 99.77. 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 Futures broke down below previous 8-day lows. This confirms that the short-term trend is down, although my guess is that it is probably just a temporary correction within a major uptrend.

Silver’s main trend is Bearish compared to Gold. The iShares Silver Trust (AMEX: SLV) has been rising in price but has been relatively weak compared to Gold since 12/7/06.

The Gold Miners ETF (GDX) has underperformed Gold futures since 10/31/07.

Inflation expectations fell 4 consecutive days, based on the behavior of the ratio of two ETFs, TIP/IEF.

U.S. Treasury Bond prices moved above previous 7-day highs. This confirms that the short-term trend is up. And the major long-term trend remains Bullish. 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 broke out above previous 7-day highs. This turns the short-term trend up. The dollar held support around 74.66, which is shaping up as a critical level. The main long-term trend remains Bearish.

The Art of Contrary Thinking: The mood has been moving away from optimism as stock prices move lower. Sentiment is far from 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 is moderately below normal. According to the weekly Investors Intelligence newsletter survey as of 1/30/08, there were 40.2% Bulls and 32.2% Bears. The ratio of Bullish advisors to Bearish advisors fell to 1.25 to 1, which below its 38-year median at 1.47. The ratio’s 38-year range is 0.28 to 17.51.

VIX “Fear Index”, now at 28.24 and rising, 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 32.44 and rising, 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 0.94, which indicates 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 0.72, 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 August low. 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:

1.03% US Dollar Index
0.50% 30Y T-Bond
-0.17% Japanese Yen
-0.44% Hospitals
-0.45% British Pound
-1.07% Malaysia
-1.07% Swiss Franc
-1.10% Australian Dollar
-1.14% Euro Index
-1.29% Dow Transports
-1.36% Consumer Staples
-1.37% Canadian Dollar
-1.39% Airlines
-1.82% Health Care
-1.85% Insurance
-1.97% Disk Drives
-1.97% Health Care
-2.07% AMEX Composite
-2.08% Health Care Products
-2.11% Canada
-2.33% Hardware
-2.49% Drugs
-2.50% Technology
-2.52% Dow Composite
-2.54% Industrial
-2.78% Computer Tech
-2.81% Consumer Discretionary
-2.82% S&P Small Caps
-2.86% Network
-2.87% S&P Mid Caps
-2.88% Materials
-2.93% Dow Industrial
-2.98% Value Line
-3.00% Wilshire 5000
-3.01% Utilities
-3.02% Russell 2000
-3.02% Nasdaq 100
-3.08% Nasdaq Composite
-3.10% S&P 100
-3.10% Biotechs
-3.14% Russell 3000
-3.14% Internet
-3.15% Russell 1000
-3.20% S&P 500
-3.36% DOT
-3.36% Japan
-3.44% Chemicals
-3.45% Dow Utilities
-3.46% Retailers
-3.53% United Kingdom
-3.56% NYSE Composite
-3.67% Natural Gas
-3.70% Oil Services
-3.70% Paper
-3.72% Banks
-3.72% Commodity Related
-3.82% REITs
-3.87% Semiconductors
-3.89% Gold Mining
-4.06% Financial
-4.07% South Korea
-4.13% Energy
-4.24% Oil
-4.24% Austria
-4.26% Singapore
-4.72% Australia
-4.73% Switzerland
-4.83% Italy
-4.89% Hong Kong
-4.93% Mexico
-5.16% Taiwan
-5.25% Germany
-5.28% Belgium
-5.33% Broker Dealers
-5.33% Netherlands
-5.53% Sweden
-5.65% Brazil
-6.01% France
-7.38% Spain