By Robert W. Colby, Senior Analyst TraderPlanet.com

Bond Market Breaks Down to Nine-Month Low

On Wednesday, major U.S. stock price indexes gapped higher and rallied until about 10:05 a.m. The market tried to start another rally several times but could not find a following. Just as they did on both Monday and Tuesday, prices turned down in the afternoon and closed weak, very near the lows of the day.

Three strikes and you’re out? For the third consedutive session, the Standard & Poor’s 500 cash index (1,522.28) probed its all-time high close of 1,527.46 set on 3/24/2000. I previously listed that number as Potential Resistance, below. It is a natural spot for the stock market to pause or reverse trend. Each day, when traders saw that the market could not hold above that level, they dumped long positions.

The Advance-Decline balance turned Bearish on both the NYSE and NASDAQ. Over the past two weeks, breadth has diverged negatively from price, thereby giving warning.

Trading volume rose both on the NYSE and NASDAQ, suggesting active buying and selling.

Various momentum oscillators have turned down after clearly losing upside momentum for weeks. They have been overbought and diverging Bearishly from price, thereby giving warning that the time for a consolidation or correction might be approaching. For example, daily MACD applied to the SPY topped out on 4/27/07 and has diverged negatively since then by falling as price made higher highs. MACD crossed under its trailing Signal Line on 5/10/07, and now both MACD and its Signal Line are heading down, indicating that price momentum is heading down. Also, the MACD Histogram is negative and falling, indicating acceleration to the downside.

Sentiment indicators have been showing extreme and increasing Bullish complacency.

On Wednesday before the open came word of a flood of M&A activity.

Alcan (AL) is recommending shareholders reject Alcoa’s (AA) hostile takeover bid, may make a bid for Alcoa, and is reportedly in merger talks with BHP Billiton (BHP).

Crescent Real Estate Equities (CEI) agreed to be acquired by Morgan Stanley (MS).

Payless ShoeSource (PSS) said it will pay $800 mln for Stride Rite (SRR).

Amazon.com (AMZN) is buying Brilliance Audio.

Norilsk Nickel is bidding for LionOre Mining International. Mergers and acquisitions, leveraged buyouts, and corporate stock buybacks are major Bullish drivers of the Bull market for stocks. I designed the following screen to pick out potential “event” stocks. 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

4.99% , MMC , MARSH & MCLENNAN
5.98% , MCO , MOODYS CORP
3.65% , AA , ALCOA
3.35% , FITB , FIFTH THIRD BANC
2.67% , ROK , ROCKWELL AUTOMAT
4.29% , MDT , MEDTRONIC
2.38% , BIIB , BIOGEN IDEC
3.47% , FNM , FANNIE MAE
2.16% , FRX , FOREST LABS STK A
3.36% , FCX , FREEPRT MCMORAN STK B
2.29% , TXT , TEXTRON
1.36% , PKI , PERKINELMER
2.52% , EMR , EMERSON ELECTRIC
0.34% , PWB , Lg Cap Growth PSD, PWB
3.07% , GRMN , GARMIN LTD
1.46% , COF , CAPITAL ONE FNCL
2.27% , AES , AES
1.23% , EWD , Sweden Index, EWD
2.16% , TNB , THOMAS & BETTS
1.85% , LTD , LIMITED BRANDS
1.38% , CVS , CVS
0.49% , XLI , Industrial SPDR, XLI
1.61% , RSH , RADIOSHACK
0.94% , EWO , Austria Index, EWO
1.46% , RFMD , RF Micro Devices Inc
0.72% , EWI , Italy Index, EWI
0.45% , XLB , Materials SPDR, XLB
0.51% , EFA , EAFE Index, EFA
4.12% , XMSR , XM Satellite R
1.66% , LPX , LOUISIANA PAC
1.32% , EWG , Germany Index, EWG
0.42% , FEU , Value LargeCap Euro STOXX 50 DJ, FEU
1.35% , IXP , Telecommunications Global, IXP
1.25% , EWS , Singapore Index, EWS
0.71% , ADRU , Europe 100 BLDRS, ADRU
0.51% , MZZ , Short 200% MidCap 400 PS, MZZ
0.58% , NTAP , NETWK APPLIANCE
1.45% , AMGN , AMGEN
0.47% , IGE , Natural Resource iS GS, IGE
0.22% , PHW , Hardware & Electronics, PHW
0.69% , LVLT , LEVEL 3 COMMUNICATIONS
0.96% , IACI , IAC/INTERACTIVCORP
0.27% , TLAB , TELLABS
0.60% , STJ , ST JUDE MEDICAL
2.70% , NIHD , NII Holdings, Inc.
1.83% , TROW , T ROWE PRICE GP
1.17% , DLTR , Dollar Tree Stores Inc
1.97% , RIG , TRANSOCEAN
0.96% , KSS , KOHLS
0.55% , IXC , Energy Global, IXC

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

-9.97% , ADI , ANALOG DEVICES
-6.56% , DDS , DILLARD STK A
-1.49% , BDH , Broadband H, BDH
-1.67% , PSI , Semiconductors, PSI
-3.61% , LLTC , LINEAR TECH
-3.05% , PEG , PUBL SVC ENTER
-0.64% , IAH , Internet Architecture H, IAH
-0.20% , PMR , Retail, PMR
-1.16% , UTH , Utilities H, UTH
-4.28% , ISIL , INTERSIL CORP
-0.13% , ELV , Value Large Cap DJ, ELV
-4.06% , PNW , PINNACLE WEST
-4.38% , AZO , AUTOZONE
-3.37% , XEL , XCEL ENERGY
-2.54% , CEG , CONSTELL ENERGY
-1.15% , IDU , Utilities DJ, IDU
-1.60% , SEE , SEALED AIR
-2.02% , XSD , Semiconductor SPDR, XSD
-3.02% , QLGC , QLOGIC
-3.20% , CTSH , Cognizant Technology Solutions
-0.84% , VGT , Info Tech VIPERs, VGT
-1.85% , XLNX , XILINX
-0.94% , IYW , Technology DJ US, IYW
-1.49% , WOR , WORTHINGTON INDS
-0.45% , HHH , Internet H, HHH
-0.52% , MTK , Technology MS sT, MTK
-1.77% , ACE , ACE
-2.46% , AYE , ALLEGHENY ENERGY
-1.73% , DUK , DUKE ENERGY
-0.97% , PXQ , Networking, PXQ
-0.99% , RWR , REIT Wilshire, RWR
-1.19% , AOC , AON
-1.40% , DISCA , Discovery Holding Co.
-1.91% , ED , CON ED
-1.47% , CPB , CAMPBELL SOUP
-1.22% , GIS , GENERAL MILLS
-2.93% , CSC , COMPUTER SCIENCE
-1.57% , XLU , Utilities SPDR, XLU
-1.13% , TUP , TUPPERWARE
-1.21% , CSX , CSX
-0.81% , FAST , Fastenal Company
-1.72% , MRVL , MARVELL TECHNOLOGY
-0.51% , PWV , Value LargeCap Dynamic PS, PWV
-1.02% , MOLX , MOLEX
-1.18% , PUI , Utilities, PUI
-0.75% , FXI , China 25 iS, FXI
-1.58% , MET , METLIFE
-0.29% , XLP , Consumer Staples SPDR, XLP
-1.64% , VLO , VALERO ENERGY
-1.49% , CEPH , Cephalon Inc

Among the nine major U.S. sectors, five rose and four fell. Utilities were the standout, falling 1.48%.

The relative ratio of foreign stock markets to the S&P 500 rose modestly. 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 turned lower following three consecutive trading days to the upside, a normal counter trend bounce. 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 slightly, again, but the gain since the low of 5/16/07 has been 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 turned down again, 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 slightly higher on lighter volume. 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 rose slightly 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, rose modestly. The mildly rising price action of recent days resembles a common minor countertrend correction pattern, a Bearish Flag. 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 rose modestly on the day. Still, silver has substantially underperformed Gold since February. The Gold Miners Index (XAU) rose moderately. 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 rose relatively sharply to its highest level in more than two weeks. This indicates a shift toward rising inflation expectations, at least for the short term.

iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT) broke below 2007 lows to its lowest price since 8/15/06, thereby giving a Bearish signal for the long term trend.

The U.S. dollar tried to rally but closed lower in a wide ranging Outside Day. Wednesday’s price action suggests that a short-term correction or consolidation could be possible. On 5/22/07, the dollar traded above and clear of a three-month downtrend line, which signaled 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.

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

1.61% Gold Mining
1.32% Germany
1.25% Singapore
1.23% Sweden
1.12% Commodity Related
0.90% Spain
0.82% Austria
0.72% Italy
0.67% Oil Services
0.57% British Pound
0.49% Industrial
0.48% Switzerland
0.47% Australia
0.47% United Kingdom
0.45% Materials
0.43% Australian Dollar
0.41% France
0.40% Broker Dealers
0.35% Health Care
0.35% Health Care Products
0.34% Insurance
0.31% Oil
0.29% Paper
0.22% Canadian Dollar
0.21% Energy
0.20% Health Care
0.16% Mexico
0.14% Belgium
0.14% Japan
0.13% NYSE Composite
0.12% Retailers
0.12% Swiss Franc
0.05% Dow Transports
0.05% Consumer Discretionary
0.03% Hospitals
0.02% Euro Index
-0.01% Biotechs
-0.02% S&P 100
-0.08% Financial
-0.09% AMEX Composite
-0.09% Japanese Yen
-0.11% Dow Industrial
-0.12% S&P 500
-0.12% South Korea
-0.14% US Dollar Index
-0.15% Russell 1000
-0.16% Wilshire 5000
-0.16% Netherlands
-0.17% Canada
-0.18% Russell 3000
-0.20% Drugs
-0.22% Banks
-0.26% Value Line
-0.26% Disk Drives
-0.27% Dow Composite
-0.27% Taiwan
-0.29% Consumer Staples
-0.31% 30Y T-Bond
-0.33% S&P Mid Caps
-0.35% Technology
-0.35% Hardware
-0.40% Russell 2000
-0.40% DOT
-0.42% Nasdaq Composite
-0.46% Chemicals
-0.46% Brazil
-0.48% S&P Small Caps
-0.51% Network
-0.52% Natural Gas
-0.63% Nasdaq 100
-0.72% Computer Tech
-0.74% Internet
-0.83% Hong Kong
-0.92% REITs
-1.10% Dow Utilities
-1.30% Semiconductors
-1.48% Utilities
-1.55% Malaysia
-1.59% Airlines

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

The U.S. stock market has shown impressive Bullish resilience since the major low on 10/10/02, more than four years ago. Stock prices have been buoyed by abundant global liquidly (following years of fiscal stimulation, rapid money supply growth, and rising corporate profits), M&A, and earnings comparisons above expectations. Still, periodic downside shakeouts are normal, and the world is a volatile place where the unexpected is always possible, so stocks are never without risk.

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.