By Robert W. Colby, Senior Analyst

“Very Little Enthusiasm For The Rally Attempt”

U.S. stock markets will be closed on Monday 5/28/07 for Memorial Day national holiday.

On Friday, major U.S. stock price indexes recovered a typical fraction of the previous day’s loss. The high-low range was contained entirely within the previous day’s range, making an inside day, a consolidation day. The short-term trend implication is that price likely will exit Friday’s range in the direction that continues the previous trend, which in this case is down.

Trading volume fell by nearly one third on both the NYSE and NASDAQ, indicating very little enthusiasm for the rally attempt.

The Advance-Decline balance was Bullish on the NYSE and a bit less Bullish on the NASDAQ. But on 5/24/07, the Cumulative Daily Advance-Decline Line for the NYSE broke down to a new three-week low from a Triple Top formation. Over the past two weeks, breadth has diverged negatively from price, thereby giving warning of trouble ahead. The Cumulative Daily Advance-Decline Line for the NASDAQ has been in a downtrend for the past six weeks.

On four trading days this past week, the Standard & Poor’s 500 cash index (1,515.73) probed above its all-time high close of 1,527.46 set on 3/24/2000, even briefly reaching as high as 1,532.43 intraday on 5/23/2007. I previously listed that closing high of 1,527.46 as Potential Resistance. The area around and near an old high makes for a natural zone for a market to pause or reverse trend. Each day, when traders saw that the market could not hold above that resistance level, they dumped long positions. The worst was on Thursday, 5/24/2007, because the S&P 500 fell so much in afternoon selling that it broke below its 10-week uptrend line. Despite a recovery attempt on Friday, the S&P remains below this broken 10-week uptrend line as of the weekly close.

The SPDR S&P 500 ETF (AMEX: SPY), which fairly represents actual trading in the capitalization weighted general stock market, broke down decisively below the uptrend line rising from the low of 3/14/07 and remains below it. The SPY gave us ample warning by forming Multiple Spinning Tops this week. The implication of Spinning Tops is that whatever trend existed previously has lost momentum and is vulnerable to correction or reversal. The relatively long upper shadow and small lower shadow accentuate the failure of the rally to overcome resistance.

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. Now, both MACD and its Signal Line are heading down, indicating that price momentum is heading down. MACD is at its lowest level in five weeks and falling. Also, the MACD Histogram is negative, at its lowest level in more than two months, and it is falling, indicating acceleration to the downside.

In the news, Coca-Cola agreed to acquire vitamin water maker Glaceau, and the Nasdaq agreed to buy the Nordic exchange. In addition, several companies announced stock buybacks. 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

1.73% , PSJ , Software, PSJ
5.52% , RFMD , RF Micro Devices Inc
0.11% , PEJ , Leisure & Entertainment, PEJ
0.24% , VCR , Consumer D. VIPERs, VCR
1.08% , IGM , Technology GS, IGM
1.13% , FPX , IPOs, First Tr IPOX-100, FPX
5.66% , CAR , Avis Budget Group, Inc. (CAR)
0.52% , OEF , LargeCap Blend S&P 100, OEF
0.61% , KLD , LargeCap Blend Socially Responsible iS, KLD
1.09% , FEU , Value LargeCap Euro STOXX 50 DJ, FEU
0.67% , PHW , Hardware & Electronics, PHW
0.56% , EFG , Growth EAFE MSCI, EFG
0.73% , VTV , Value VIPERs, VTV
1.37% , EKH , Europe 2001 H, EKH
2.29% , VRSN , VeriSign Inc
0.36% , MKH , Market 2000 H, MKH
0.45% , NY , Value LargeCap NYSE 100 iS, NY
2.62% , FISV , FISERV
0.75% , VBR , Value SmallCap VIPERS, VBR
0.74% , IYZ , Telecom DJ US, IYZ
0.61% , IXN , Technology Global, IXN
0.83% , VUG , Growth VIPERs, VUG
0.87% , VB , Small Cap VIPERs, VB
0.47% , XLG , LargeCap Rydex Rus Top 50, XLG
1.08% , SLE , SARA LEE
1.38% , SWH , Software H, SWH
1.94% , GOOG , Google
3.24% , DHR , DANAHER
1.02% , ABI , Applera Corp-Applied Biosystems Group (ABI)
1.92% , HPC , HERCULES
0.25% , BDH , Broadband H, BDH
1.64% , AV , AVAYA
0.58% , JKD , LargeCap Blend Core iS M, JKD
1.46% , IGV , Software, IGV
1.97% , VWO , Emerging VIPERs, VWO
3.60% , TBH , Telebras H, TBH
0.97% , PZJ , SmallCap PS Zacks, PZJ
3.54% , BEAS , BEA Systems Inc
2.64% , PLL , PALL
0.61% , ELV , Value Large Cap DJ, ELV
0.11% , IYG , Financial Services DJ, IYG

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

-3.19% , TRB , TRIBUNE
-0.70% , PMR , Retail, PMR
-2.02% , WYNN , Wynn Resorts L
-0.33% , ITF , Japan LargeCap Blend TOPIX 150, ITF
-0.60% , GPS , GAP
-1.14% , SO , SOUTHERN
-0.81% , AMD , ADV MICRO DEV
-0.29% , SANM , SANMINA
-0.13% , IDU , Utilities DJ, IDU
-0.35% , D , DOMINION RSCS
-0.11% , IEF , Bond, 10 Year Treasury, IEF
-0.09% , MRK , MERCK & CO
-1.18% , DUK , DUKE ENERGY
-0.07% , LQD , Bond, Corp, LQD
-1.15% , MAT , MATTEL
0.75% , HSP , HOSPIRA
0.15% , HHH , Internet H, HHH
0.14% , EWK , Belgium Index, EWK
0.14% , VHT , Health Care VIPERs, VHT
0.64% , VIS , Industrials VIPERs, VIS
0.66% , VGK , European VIPERs, VGK
0.64% , EFA , EAFE Index, EFA
1.92% , BIG , BIG LOTS
0.76% , JKH , MidCap Growth iS M, JKH
0.18% , BMET , BIOMET
0.81% , IR , INGER RAND
0.26% , PIC , Insurance, PIC
1.27% , KO , COCA COLA
0.28% , FDL , Dividend Leaders, FDL
0.06% , SHY , Bond, 1-3 Year Treasury, SHY
0.54% , PWT , Growth SmallCap Dynamic PS, PWT
2.28% , ATVI , Activision Inc.
1.92% , ADRE , Emerging 50 BLDRS, ADRE
0.48% , TER , TERADYNE
1.23% , MLNM , Millennium Pharmaceuticals Inc
0.51% , MDP , MEREDITH
0.11% , IXG , Financials Global LargeCap Value, IXG
0.46% , RPV , Value S&P 500, RPV
0.80% , IJT , Growth BARRA Small Cap 600, IJT

Among the nine major U.S. sectors, eight rose and one fell. Energy and Materials were standouts, rising more than 1.00% each.

The relative ratio of foreign stock markets to the S&P 500 rose to its highest level in more than a week, turning the short term trend to neutral from Bearish. In the bigger picture, foreign stocks outperformed U.S. stocks since the Bull Market started in 2002. That is a powerful major trend.

The ratio of the NASDAQ Composite relative to the S&P 500 rose slightly but remains in a downtrend. On 5/17/07, it fell to 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 continues lower. 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 recovered slightly but remains 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, recovered a fraction of the previous day’s steeper loss. That Thursday drop was confirmed by rising volume, while volume on Friday was very low. The Energy Select Sector SPDR ETF (XLE) also recovered fractionally after breaking sharply lower to the lowest prices in a week on rising volume on Thursday. XLE outperformed USO again. Since 3/2/07, 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, recovered slightly and indecisively. On 5/24/07, GLD fell sharply, breaking April and May lows, thereby confirming an ongoing significant downside correction. The iShares Silver Trust (AMEX: SLV) followed GLD slightly higher. Since 12/7/06, SLV has underperformed GLD substantially, and that trend continues. The Gold Miners Index (XAU) recovered a fraction of the previous day’s steeper loss. 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 strongly to its highest level in more three weeks. It is in a rising trend since 4/16/07, indicating rising inflation expectations.

iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT) sagged slightly and indecisively lower on the day. The larger trends are Bearish.

The U.S. dollar fell slightly but remains in an uptrend. On 5/25/07, the dollar rose to close at a new six-week closing high, a sign of strength. 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:

3.03% Brazil
2.03% Australia
1.97% South Korea
1.74% Mexico
1.71% Malaysia
1.61% Oil
1.61% Oil Services
1.56% Energy
1.54% Paper
1.54% Taiwan
1.33% Canada
1.32% Germany
1.27% Commodity Related
1.18% Materials
1.15% Computer Tech
1.09% Hong Kong
1.05% Chemicals
1.03% Netherlands
0.95% Gold Mining
0.89% Network
0.88% REITs
0.86% AMEX Composite
0.84% Technology
0.84% DOT
0.81% Natural Gas
0.78% Nasdaq 100
0.78% France
0.76% Nasdaq Composite
0.76% Internet
0.75% S&P Small Caps
0.75% Switzerland
0.74% Russell 2000
0.72% Austria
0.72% Spain
0.72% United Kingdom
0.67% S&P Mid Caps
0.66% Value Line
0.65% NYSE Composite
0.62% Consumer Staples
0.60% Industrial
0.60% Hospitals
0.60% Sweden
0.59% Biotechs
0.59% Hardware
0.59% Singapore
0.58% Wilshire 5000
0.56% Russell 3000
0.56% Italy
0.55% S&P 500
0.55% S&P 100
0.55% Russell 1000
0.49% Dow Industrial
0.40% Insurance
0.37% Semiconductors
0.35% Consumer Discretionary
0.34% Canadian Dollar
0.27% Dow Composite
0.24% Banks
0.23% Dow Transports
0.19% Financial
0.14% Belgium
0.11% Health Care
0.09% Euro Index
0.05% Utilities
0.05% Swiss Franc
0.02% Drugs
-0.03% 30Y T-Bond
-0.04% Health Care Products
-0.05% Health Care
-0.07% Retailers
-0.07% US Dollar Index
-0.07% British Pound
-0.17% Dow Utilities
-0.21% Broker Dealers
-0.24% Australian Dollar
-0.25% Japanese Yen
-0.28% Disk Drives
-0.33% Airlines
-0.42% Japan

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.