Daily Stock Market Commentary – 5/23/2007

The relative ratio of foreign stock markets to the S&P 500 rose, but only slightly. On 5/21/07, this ratio fell to a new nine-week low, thereby confirming again an ongoing downside correction. In the bigger picture, foreign stocks outperformed U.S. stocks since the Bull Market started in 2002. That is a powerful major trend, but all major trends have corrections.

The ratio of the NASDAQ Composite relative to the S&P 500 rose for the third consecutive trading day but is still down for the month of May. On 5/17/07, it fell a new seven-month low, the lowest since October 2006, for a Bearish confirmation for the longer term. The NASDAQ has greatly underperformed the S&P 500 for more than seven years, since 3/10/00. The secular trend is Bearish.

The ratio of Growth stocks relative to Value stocks rose sharply, but the gain was only a modest fraction of the previous big loss from the peak on 4/27/07. On 5/16/07, the ratio fell to its lowest level in three months, and that was a Bearish trend confirmation for Growth. Growth has substantially underperformed Value since year 2000, so the secular trend is Bearish.

The ratio of Small Cap stocks relative to Large Caps rose for the third consecutive trading session, but it is still down substantially from its peak on 4/16/07. On 5/17/07, it fell to a new nine-month low, which was another in a series of Bearish trend confirmations for Small Caps. Longer term, Small Caps have underperformed for more than a year, since 4/19/06, so the major trend also is Bearish for Small Caps relative to Large Caps.

The U.S. OIL FUND ETF (AMEX: USO), which reflects the market price of crude oil futures, turned moderately lower on lighter volume, which is a sign of a normal minor correction. On 5/21/07, USO rose to its highest price since 5/1/07 and decisively broke above a downtrend line falling from the top of 4/2/03. The Energy Select Sector SPDR ETF (XLE) also turned moderately lower on lighter volume. On 5/21/07, XLE made a new all-time high price, thereby confirming a major uptrend. The stocks of the oil companies have been much stronger than oil as a commodity, and that looks like an important trend.

StreetTRACKS Gold Trust ETF (NYSE: GLD), which reflects the market price of gold futures, reversed to the downside with a Bearish Engulfing Line Japanese Candlestick. Over the previous two day’s bounce, GLD recovered only a fraction of its steep loss since 5/7/07. On 5/17/07, GLD fell to a new two-month low, thereby confirming a significant downside correction. The iShares Silver Trust (AMEX: SLV) also fell on the day, although not as steeply. Still, silver has substantially underperformed Gold since February. The Gold Miners Index (XAU) was one of the weakest industry indexes of the day. XAU fell to a new two-month low on 5/17/07, confirming an intermediate term downtrend. XAU has significantly underperformed GLD since 4/16/07.

The ratio of the price of bond TIPS to 10-year U.S. Treasury Notes fell moderately. On 5/21/07, the ratio rose to its highest level in more than two weeks, indicating a shift toward rising inflation expectations for the short term. But on 5/16/07, the ratio fell to its lowest level in eight weeks, which seemed to signal falling inflation expectations. With indications contradictory, it’s anybody’s guess at this point.

iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT) fell to its lowest price since 1/31/07, thereby confirming a Bearish trend for the intermediate term. Longer term, Bonds have been forming a consolidation/correction pattern with a downward bias since 6/16/03.

The U.S. dollar rose to its highest closing price in more than five weeks. The dollar traded above and clear of a three-month downtrend line, which signals penetration of resistance. From 4/25/07 through 5/1/07, the dollar established and tested technical support at 81.10, which was just a little above its 25-month price low at 80.48 set on 12/31/2004. Long-term trends are far from encouraging, however. The U.S. dollar has been in a major Bearish trend for nearly six years, since it peaked out at 121.29 on 7/5/2001. Beyond that, the dollar has been weakening since WWII, so the secular trend is also Bearish.

To sum up the current position of the U.S. stock market:

Liquidity driven merger and acquisitions news has been helping to keep the old Bull alive. Both U.S. and foreign corporations hold excess cash after several years of rising profits, and so M&A speculation as well as leveraged buyouts and corporate stock buybacks have provided substantial Bullish stimulus to stock prices. In 2007, mergers and acquisitions are running about 60% ahead of 2006’s record pace, driven by rising stock prices and private-equity funds that raised more than $250 billion for takeovers since the start of 2006. Takeovers are on track to surpass 2006’s all-time high of $3.49 trillion, according to data compiled by Bloomberg.

Conservative earnings estimates also have been useful in keeping the old Bull alive. First quarter 2007 corporate earnings reflected a significant growth slowdown. Nevertheless, earnings were ahead of expectations, which had been lowered to very conservative levels in advance of actual reporting. Managements and Wall Street have learned that investors hate disappointments, so they simply don’t give them any–unless absolutely necessary.

Stocks generally are fully valued to over priced by long-term historical standards. But that alone does not mean that stocks cannot continue to trend higher.