By Robert W. Colby, Senior Analyst

Critical Test At Hand.

Indexes test January lows: Dow Industrials and Transports hold, while S&P and NASDAQ break, based on closes only.

Energy, Materials, Consumer Staples, and Industrial Stock Sectors’ Relative Strength Ratios rose to new highs.

Financial Stock Sector Relative Strength Ratio fell to another new 7-year low, and price fell to a new 5-year low.

Crude Oil rose to another new high.

On Thursday, the major stock price indexes opened lower and continued to chop irregularly lower most of the day. Prices closed weakly, near their lowest levels of the day. The S&P 500 broke down below 1,307.39, the intraday low of 3/4/2008, for a new 6-week low. Counting closes only, the S&P 500 and the NASDAQ Composites both finished the day at new 18-month lows. The volume of declining stocks was more than 17 times the volume of advancing stocks, indicating intense selling pressure on balance.

Technically, all trends are down for the broad-based stock price indexes. Most days, the stock market has been quite reactive to the news, rumors, and “reports” of the day. On Thursday, commentators blamed reports of declining values of the assets on bank balance sheets. 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

2.78% , PSQ , Short 100% QQQ, PSQ
0.75% , DBC , Commodity Tracking, DBC
0.30% , SHY , Bond, 1-3 Year Treasury, SHY
2.29% , ORCL , ORACLE
3.42% , HRB , H&R BLOCK
1.44% , FLR , FLUOR
0.36% , NE , NOBLE
0.60% , MLNM , Millennium Pharmaceuticals Inc
1.64% , SH , Short 100% S&P 500, SH
0.49% , PX , PRAXAIR
0.09% , YHOO , YAHOO

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

-2.08% , XSD , Semiconductor SPDR, XSD
-22.10% , CIT , CIT GROUP
-11.73% , PETM , PETsMART Inc
-1.48% , PSJ , Software, PSJ
-2.27% , MTK , Technology MS sT, MTK
-2.33% , PWT , Growth SmallCap Dynamic PS, PWT
-5.69% , BHH , Internet B2B H, BHH
-11.10% , JCP , JC PENNEY
-2.31% , RPG , Growth S&P 500, RPG
-6.72% , PWER , POWER ONE
-2.68% , PWP , Value MidCap Dynamic PS, PWP
-4.06% , MHP , MCGRAW HILL
-4.59% , IYR , Real Estate US DJ, IYR
-4.41% , ERIC.O , LM Ericsson Telephone Company
-1.22% , EWP , Spain Index, EWP
-1.45% , FEU , Value LargeCap Euro STOXX 50 DJ, FEU
-2.10% , IYH , Healthcare DJ, IYH
-2.67% , PXN , Nanotech Lux, PXN
-5.73% , TLAB , TELLABS
-2.47% , PJP , Pharmaceuticals, PJP
-2.90% , URBN , Urban Outfitters Inc.
-6.28% , NVDA , NVIDIA
-6.27% , JWN , NORDSTROM
-1.73% , ADRD , Developed 100 BLDRS, ADRD
-4.31% , MCO , MOODYS CORP
-2.70% , PXE , Energy Exploration & Prod, PXE
-1.69% , PHJ , Dividend Growth PS, PHJ
-2.32% , FDL , Dividend Leaders, FDL
-0.53% , IIH , Internet Infrastructure H, IIH
-4.58% , BBY , BEST BUY
-2.54% , RFG , Growth MidCap S&P 400, RFG
-3.21% , IBB , Biotechnology, IBB
-5.11% , JNPR , Juniper Networks Inc
-1.84% , IGM , Technology GS, IGM
-8.64% , SLM , SLM CORP

Sectors: among the 9 major U.S. sectors, all 9 fell .

Major Sectors Ranked for the Day
% Price Change Sector

-0.89% Materials SPDR, XLB
-0.91% Consumer Staples SPDR, XLP
-1.39% Technology SPDR, XLK
-1.90% Industrial SPDR, XLI
-2.00% Energy SPDR, XLE
-2.01% Health Care SPDR, XLV
-2.04% Utilities SPDR, XLU
-2.44% Consumer Discretionary SPDR, XLY
-3.46% Financial SPDR, XLF

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

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 3/6/08, the XLP/SPY Relative Strength Ratio rose to new 4-year high.

Industrial (XLI) Neutral, Market Weight. On 3/6/08, the XLI/SPY Relative Strength Ratio made a new all-time 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.

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 3/6/08, 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 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 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) rose to another new high. 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) pulled back slightly but the trends are 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 recovered slightly. Bonds’ price trends seem uncertain. Governments are stronger than corporate. 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 3/5/08, there were 41.9% Bulls and 36.6% Bears. The ratio of Bullish advisors to Bearish advisors fell to 1.14, up from 1.15 to 1 the previous week. 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 27.55 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 29.99 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 1.12, 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.

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

1.88% Tokyo Nikkei
1.10% Sydney All Ords
0.99% Hang Seng
0.35% 30Y T-Bond
-0.27% Gold
-0.60% AMEX Composite
-0.89% Materials
-0.89% Japan
-0.91% Consumer Staples
-0.97% Dow World Index
-1.18% CDNX Composite
-1.22% Chemicals
-1.27% Commodities
-1.38% German DAX
-1.39% Technology
-1.44% Paper
-1.49% London FTSE
-1.53% Euro Top 100
-1.56% Oil Services
-1.60% Italy
-1.65% French CAC
-1.66% Comp. Tech
-1.67% Drugs
-1.75% Dow Industrial
-1.75% Insurance
-1.79% Toronto 300
-1.89% Health Care Products
-1.90% Industrial
-1.91% DOT
-1.95% Hospitals
-2.00% S&P 100
-2.00% Energy
-2.01% Health Care
-2.04% Utilities
-2.12% Health Care
-2.17% Utilities
-2.20% NYSE Composite
-2.20% S&P 500
-2.21% Dow Composite
-2.24% Dow Utilities
-2.26% Russell 1000
-2.29% Wilshire 5000
-2.30% Nasdaq Composite
-2.32% Russell 3000
-2.34% Nasdaq 100
-2.36% Biotechs
-2.44% Consumer Discretionary
-2.45% Internet
-2.49% S&P Small Caps
-2.50% Network
-2.51% Telecoms
-2.53% Natural Gas
-2.63% Hardware
-2.63% Semis
-2.75% S&P Mid Caps
-2.79% Value Line
-2.91% Dow Transports
-2.96% Disk Drives
-2.97% Australia
-3.07% Russell 2000
-3.14% Oil
-3.16% Transport
-3.61% Banks
-3.82% Financial
-3.97% Retailers
-4.12% REITs
-4.88% Broker Dealers
-6.09% Airlines

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 (1,304.34):

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 (1,304.34):

Potential Support
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