By Robert W. Colby, Senior Analyst TraderPlanet.com
“Reports” create market chaos. Who benefits?
S&P 500 broke down below its 2/7/08 low of 1,316.75, but bounced back to close above it.
Financial Stock Sector Relative Strength Ratio fell to another new 7-week low.
CRB Commodity price index, Crude Oil, and Gold all reversed sharply to the downside, breaking previous days’ lows, and possibly signaling a short-term pullback.
Materials and Energy Stock Sectors followed the commodities that these companies produce lower in price.
On Tuesday, the major stock price indexes opened lower following a report that Citigroup may need still more capital from outside investors. Stocks fell further after Fed Chairman Ben Bernanke told the Independent Community Bankers of America that defaults and foreclosures in the housing market would continue to increase, and banks should write down the principal amount on mortgage loans. Stocks bottomed and turned up after 2:00 p.m. on yet another CNBC report about a bailout scheme to save bond insurer Ambac. Never mind that none of the past reported pending bailouts never actually happened, these reports very effectively create market chaos.
Stock price indexes closed well above their lows, but most were down on the day. The number of declining stocks was 110% greater than the number of advancing stocks.
Volume on the NYSE rose 16%, indicating increased selling pressure on stocks. The volume of declining stocks was 134% greater than the volume of advancing stocks, indicating net selling pressure on balance.
Stock market action, in general, has been choppy and erratic over the past 6 weeks, but the major stock price indexes have made little net progress. Most days, the stock market has been quite reactive to the news, rumors, and “reports” of the day. As noted here repeatedly, many of these “reports” never pan out, but they do contribute to unpredictable volatility. This makes for a high-risk environment for stock trading, both for longs and for shorts. Be nimble. Be quick.
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
7.31% , HOT , STARWOOD HOTELS
7.63% , AMAT , APPLIED MATERIAL
7.85% , ABK , AMBAC FINL GRP
1.19% , IAH , Internet Architecture H, IAH
2.65% , CMA , COMERICA
3.60% , MAR , MARRIOTT INTL STK A
3.39% , XHB , Homebuilders SPDR, XHB
4.39% , SWY , SAFEWAY
3.07% , FE , FIRSTENERGY
2.64% , OMX , OFFICEMAX INC., OMX
3.17% , DYN , DYNEGY
2.40% , ALTR , ALTERA
2.64% , RYAAY , Ryanair Holdings plc
4.56% , VC , VISTEON
2.11% , NSM , NATL SEMICONDUCT
2.59% , LH , LAB CRP OF AMER
0.34% , IGM , Technology GS, IGM
1.88% , WOR , WORTHINGTON INDS
1.30% , STJ , ST JUDE MEDICAL
1.05% , BIG , BIG LOTS
3.35% , LUV , SOUTHWEST AIRLS
2.10% , HSP , HOSPIRA
1.72% , MV , METAVANTE TECHNOLOGIES, MV
2.85% , MBI , MBIA
4.66% , AMZN , Amazoncom Inc
4.13% , THC , TENET HEALTHCARE
2.07% , CVS , CVS
0.27% , PXQ , Networking, PXQ
2.45% , EXC , EXELON CORP
1.55% , VPU , Utilities VIPERs, VPU
1.97% , EWT , Taiwan Index, EWT
1.71% , TJX , TJX
3.38% , PEG , PUBL SVC ENTER
0.58% , IYT , Transportation Av DJ, IYT
1.19% , ZMH , ZIMMER HLDGS
1.00% , AFL , AFLAC
0.40% , PHW , Hardware & Electronics, PHW
1.48% , PMCS , PMC SIERRA
0.34% , IYC , Consumer Cyclical DJ, IYC
0.52% , MTK , Technology MS sT, MTK
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol , Name
-1.69% , PEJ , Leisure & Entertainment, PEJ
-3.71% , PGJ , China LargeCap Growth G D H USX PS, PGJ
-5.93% , FMCN , Focus Media, FMCN
-9.83% , NOVL , NOVELL
-1.65% , IXP , Telecommunications Global, IXP
-5.82% , MON , MONSANTO
-2.78% , HRB , H&R BLOCK
-8.06% , ETFC.O , E*TRADE FINANCIAL
-2.24% , LEG , LEGGETT & PLATT
-2.68% , AVY , AVERY DENNISON
-1.41% , DGT , Global Titans, DGT
-5.27% , MHS , MEDCO HEALTH
-4.29% , C , CITIGROUP
-3.29% , LAMR , Lamar Advertising Company
-1.61% , EWI , Italy Index, EWI
-1.20% , SPLS , STAPLES
-1.83% , VWO , Emerging VIPERs, VWO
-4.19% , MTG , MGIC INVESTMENT
-2.21% , TXN , TEXAS INSTRUMENT
-0.94% , ADRU , Europe 100 BLDRS, ADRU
-4.12% , CMI , CUMMINS
-2.18% , AGN , ALLERGAN
-3.06% , WB , WACHOVIA
-2.41% , XLB , Materials SPDR, XLB
-2.83% , BLL , BALL
-1.54% , FEZ , Euro STOXX 50, FEZ
-4.14% , KG , KING PHARM
-2.72% , GOOG , Google
-0.83% , NYC , LargeCap Blend NYSE Composite iS, NYC
-1.29% , RX , IMS HEALTH
-4.37% , FCX , FREEPRT MCMORAN STK B
-1.48% , FEU , Value LargeCap Euro STOXX 50 DJ, FEU
-1.52% , SUN , SUNOCO
-2.69% , ORCL , ORACLE
-2.38% , ECL , ECOLAB
-2.12% , GLD , Gold Shares S.T., GLD
-2.37% , SHW , SHERWIN WILLIAMS
-2.11% , XRX , XEROX
-1.29% , MVV , Ultra MidCap400 Double, MVV
-4.11% , FXI , China 25 iS, FXI
Sectors: among the 9 major U.S. sectors, 3 rose and 9 fell .
Major Sectors Ranked for the Day
% Price Change Sector
1.73% Utilities SPDR, XLU
0.14% Technology SPDR, XLK
0.12% Health Care SPDR, XLV
-0.07% Consumer Staples SPDR, XLP
-0.16% Consumer Discretionary SPDR, XLY
-0.55% Financial SPDR, XLF
-1.17% Industrial SPDR, XLI
-1.95% Energy SPDR, XLE
-2.41% Materials SPDR, XLB
Looking beyond the daily fluctuation to the major trends (listed in order of long-term relative strength):
Materials (XLB) Neutral, Market Weight. On 3/3/08, 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, but since then it has turned sideways/neutral.
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 3/3/08, the XLI/SPY Relative Strength Ratio made a new all-time high, but it has eroded somewhat recently.
Health Care (XLV) Neutral, Market Weight. The XLV/SPY Relative Strength Ratio has eroded significantly since its 2-year high on 1/17/08, and so XLV has been slipping in these rankings.
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 3/3/08, the XLF/SPY Relative Strength Ratio fell to a new 7-week low. On 1/8/08, the XLF/SPY Relative Strength Ratio fell to a new 7-year low, confirming a major downtrend.
Foreign stock indexes have been relatively strong since 2/11/08, when Relative Strength of EFA/SPY turned up after making a new 13-month low. Despite this upturn, the EFA (the EAFE, international developed country stock markets (ex the U.S. and Canada) still 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 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 (April futures contract) reversed sharply to the downside, breaking the lows of the previous 4 trading days. Crude Oil’s short-term trend could be turning corrective, but its main price trend remains 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) reversed sharply to the downside, breaking the lows of the previous 3 trading days. Gold’s short-term trend could be turning corrective, but its main price trend remains Bullish.
Silver outperformed Gold since 12/14/07, and recently that uptrend has been accelerating. 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) has outperformed Gold futures somewhat short-term, since 2/7/08, but still significantly underperformed Gold since 10/31/07. Therefore, longer-term, GDX is Bearish relative to Gold itself.
U.S. Treasury Bond prices reversed sharply to the downside, breaking the lows of the previous 2 trading days. Bonds’ short-term price trend could be turning corrective. 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 has repeatedly confirmed its downtrend in all time frames. All trends are Bearish.
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 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 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: 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 25.52, 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 28.26, 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 0.96, 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 0.78, 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.
1.73% Utilities
1.59% Airlines
1.59% Utilities
1.49% Dow Utilities
1.26% Hospitals
0.85% Hardware
0.81% Semis
0.65% Transport
0.60% Dow Transports
0.60% Nasdaq 100
0.48% Insurance
0.42% Comp. Tech
0.38% DOT
0.36% Disk Drives
0.30% Dow Composite
0.28% Biotechs
0.15% Internet
0.14% Technology
0.13% Retailers
0.12% Health Care
0.07% Nasdaq Composite
-0.04% Health Care
-0.07% Consumer Staples
-0.09% Paper
-0.16% Consumer Discretionary
-0.27% Value Line
-0.28% United Kingdom
-0.34% S&P 500
-0.34% S&P 100
-0.34% Health Care Products
-0.36% AMEX Composite
-0.37% Dow Industrial
-0.40% S&P Small Caps
-0.40% Wilshire 5000
-0.41% Singapore
-0.47% Russell 2000
-0.48% Russell 1000
-0.48% Russell 3000
-0.50% Toronto 300
-0.55% Financial
-0.55% Netherlands
-0.56% 30Y T-Bond
-0.57% Dow World Index
-0.57% Sydney All Ords
-0.58% S&P Mid Caps
-0.60% Drugs
-0.67% Banks
-0.67% South Korea
-0.67% Switzerland
-0.72% Network
-0.72% REITs
-0.87% London FTSE
-0.88% NYSE Composite
-0.90% Mexico
-1.01% France
-1.03% Belgium
-1.05% Telecoms
-1.05% Malaysia
-1.13% Natural Gas
-1.16% Canada
-1.17% Industrial
-1.38% Broker Dealers
-1.41% French CAC
-1.42% Spain
-1.44% Oil Services
-1.44% Austria
-1.45% Euro Top 100
-1.46% Commodities
-1.51% Oil
-1.51% Germany
-1.52% CDNX Composite
-1.61% Italy
-1.72% Sweden
-1.95% Energy
-1.97% Hang Seng
-2.14% Hong Kong
-2.17% German DAX
-2.26% Brazil
-2.29% Chemicals
-2.32% Japan
-2.41% Materials
-2.76% Australia
-3.63% Gold
To discover the next Resistance, traders probably will be watching how the market acts at the following levels for the Standard & Poor’s 500 cash index (1,326.75):
Potential Resistance
1,576.09, high of 10/11/2007
1,552.76, high of 10/31/2007
1,523.57, high of 12/11/2007
1,498.85, high of 12/26/2007
1,403.45, low of 1/7/2008
1,396.02, high of 2/1/2008
1,388.34, high of 2/27/2008
To discover the next Support, traders probably will be watching how the market acts at the following levels for the S&P 500 cash index (1,326.75):
Potential Support
1,307.39, low of 3/4/2008
1,270.05, low of 1/23/2008
1,261.30, low of 8/10/2006
1,224.54, low of 7/18/2006
1,219.29, low of 6/14/2006
1,214.45, low of 11/4/2005
1,201.07, low of 11/2/2005
1,168.20, low of 10/13/2005
1,163.23, high of 3/5/2004
1,159.86, low of 5/17/2005
1,153.64, low of 5/16/2005
1,146.18, low of 5/13/2005
1,139.14, low of 4/29/2005
1,136.37, low of 4/20/2005
