Daily Stock Market Commentary – 3/14/2008

A “good news” report attributed to Standard & Poor’s suggested that the bulk of write-downs of subprime securities already may be reflected in the financial statements for banks that have already announced their full year 2007 results. After 3 hours of rally, enthusiasm seemed to dissipate, perhaps on a sober realization that Standard & Poor’s estimate is much lower than many other estimates, and it is hard to know which estimates might prove to be right, if any.

The main technical trend is still down for the broad-based stock price indexes. There are still a lot of fundamental problems, such as financial crisis, soaring commodity price inflation, and economic contraction. But some days those problems are pushed aside by hope for some kind of a rescue, from the government or big investors. Day to day, the stock market has been quite reactive to the news, rumors, and “reports” of the day, which have been plentiful but not always accurate. These “reports” strike at any unpredictable moment, like a bolt out of the blue, disrupting trends and making short-termtrading

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.

Sectors: among the 9 major U.S. sectors, 4 rose, 4 fell and 1 closed unchanged.

2.44% Materials SPDR, XLB
1.67% Energy SPDR, XLE
1.38% Industrial SPDR, XLI
0.10% Consumer Discretionary SPDR, XLY
0.00% Consumer Staples SPDR, XLP
-0.13% Health Care SPDR, XLV
-0.24% Financial SPDR, XLF
-0.31% Utilities SPDR, XLU
-0.40% Technology SPDR, XLK

Energy (XLE) Neutral, Market Weight. On 3/6/08, the XLE/SPY Relative Strength Ratio rose to new all-time high, confirming a major uptrend.

Materials (XLB) Neutral, Market Weight. On 3/6/08, the XLB/SPY Relative Strength Ratio rose to a new all-time high, confirming a major uptrend.

Consumer Staples (XLP) Neutral, Market Weight. On 3/10/08, the XLP/SPY Relative Strength Ratio rose to new 4-year high.

Utilities (XLU) Neutral, Market Weight. The XLU/SPY Relative Strength Ratio has eroded significantly since its all-time high on 1/9/08, and so Utilities have been slipping in these rankings.

Industrial (XLI) Neutral, Market Weight. On 3/13/08, the XLI/SPY Relative Strength Ratio made a new all-time high.

Health Care (XLV) Bearish, Underweight. On 3/11/08, the XLV/SPY Relative Strength Ratio made a new 4-month low.

Technology (XLK) Bearish, Underweight. On 2/25/08, the XLK/SPY Relative Strength Ratio fell to a new 10-month low, confirming a significant downtrend.

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.

Financial (XLF) Bearish, Underweight. On 3/10/08, the XLF/SPY Relative Strength Ratio fell to a new 7-year low, and price fell to a new 5-year low.

Foreign stock indexes have been relatively strong for the short term since 2/11/08. Intermediate term, however, the EFA (the EAFE, international developed country stock markets,(ex the U.S. and Canada) has underperformed since 11/27/07.

NASDAQ Composite price remains Bearish. On 3/3/08, Relative Strength fell to a new 9-month low, confirming a significant downtrend.

Growth Stock/Value Stock Relative Strength Ratio has recovered significantly from a low on 2/1/08 but still has underperformed since the peak on 11/7/07. The Growth/Value ratio (IWF/IWD) appears to be in an intermediate-term uncertain 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 (April futures contract) moved up to another new high, and all trends are Bullish. 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) moved up to another new high, and all trends are Bullish.

Silver outperformed Gold since 12/14/07. Although Silver has been strong over this intermediate term, iShares Silver Trust (AMEX: SLV) has been relatively weak compared to Gold longer term, since 12/7/06. In addition, for the past 28 years, since 1/2/80, Silver has underperformed Gold.

The Gold Miners ETF (GDX) fell sharply since 3/4/08. And longer-term, GDX significantly underperformed Gold since 10/31/07. Therefore, GDX trends have been Bearish relative to Gold itself.

U.S. TreasuryBond Pricesconsolidated gains following a new 1-month price high. Bonds benefit from financial crisis. U.S. governments have been much stronger than corporates. 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 plunged steeply to another new all-time low.

The Art of Contrary Thinking: Traders need to be extremely nimble to keep up with rapid changes in the mass mood of late. Beyond the day-to-day swings, sentiment never really reached levels associated with extreme pessimism. So, crowd psychology could get more Bearish before it is over. The business and financial news has flipped from fear to hope and back again every few days. Investors’ moods and stock volatility have jumped up and down abruptly with the latest “reports”. When mass psychology shifts so dramatically and unpredictably from hope to fear from one day to the next, risk control becomes more important than aggressive profit seeking. Stay flexible.

Sentiment/Contrary Opinion: There are more Bears than Bulls for the first time in years. According to the weekly Investors Intelligence newsletter survey as of 3/12/08, there were 31.1% Bulls and 43.6% Bears. The ratio of Bullish advisors to Bearish advisors fell to 0.71, the lowest level in more than 5 years, and down from 1.14 the previous week. The ratio’s 38-year range is 0.28 to 17.51, and the median is 1.47.

VIX “Fear Index”, now at 27.29, 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 29.86, is relatively low by Bear Market standards (around 35 to 80) but relatively high byBull market

CBOE Put/Call Ratio is 0.82, which indicates Bearish sentiment. Its 4-year simplemoving average

ISEE Call/Put Ratio is 0.98, 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.