Daily Stock Market Commentary – 5/30/2008

On Thursday, major stock price indexes opened slightly lower but rallied strongly after 10:30 a.m., as the price of July Crude Oil fell $4.41. Stocks peaked at 2:23 p.m. and drifted lower in late trading, surrendering most (nearly 2/3) of their gains, which detracts from generally Bullish statistics for the day. The S&P 500 closed at 1,398.26, up 7.42 or 0.53%. Total NYSE volume rose 1%. The volume of advancing stocks minus the volume of declining stocks was net +24% of the volume of changed stocks.

MACD for the SPY continued to move lower, and the number of New Lows was greater than the number of New Highs on the NYSE.

Stock index price action on Monday 5/19/08 fit the definition of a Shooting Star: a Bearish Reversal Japanese Candlestick Signal that implies that the previous uptrend should reverse to the downside. Indeed, stocks fell sharply over the next 4 trading days. On Wednesday 5/21/08, momentum indicators turned Bearish: RSI (14) and Stochastic (14) broke down to their lowest level in more than a month, and MACD Histogram turned negative. The popular S&P DEP RECEIPTS (AMEX: SPY) broke down below an uptrend line rising from its 3/17/08 low. That uptrend line was the lower boundary line of a Bearish Rising Wedge pattern. That breakdown implies a test of the March low.

I have been assuming that the March-May rally was nothing more than a counter-trend rally and Secondary Reaction Continuation Pattern within the context of a Primary Bearish Trend. The sum total weight of the evidence for the stock market in general appeared to be taking on more of a Bearish bias last week…but this week, not so bad. Nevertheless, a cautious approach still seems prudent.

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
1.72% , RFG , Growth MidCap S&P 400, RFG
0.44% , UTH , Utilities H, UTH
2.03% , PSJ , Software, PSJ
7.47% , BIG , BIG LOTS
5.64% , TE , TECO ENERGY
5.40% , CR , CRANE
4.82% , BBY , BEST BUY
2.14% , IBB , Biotechnology, IBB
3.97% , CTSH , Cognizant Technology Solutions
5.69% , JBL , JABIL CIRCUIT
1.53% , VHT , Health Care VIPERs, VHT
3.59% , BMC , BMC SOFTWARE
8.23% , CFC , COUNTRYWIDE FNCL
2.81% , BBH , Biotech H, BBH
0.77% , JKD , LargeCap Blend Core iS M, JKD
3.58% , UIS , UNISYS
1.53% , PHW , Hardware & Electronics, PHW
2.11% , PZI , Micro Cap Zachs, PZI
4.28% , MHP , MCGRAW HILL
1.08% , VNQ , REIT VIPERs, VNQ
1.46% , PHJ , Dividend Growth PS, PHJ
1.05% , RYAAY , Ryanair Holdings plc
4.41% , COH , COACH
2.93% , IVGN , Invitrogen Corporation
3.10% , ADSK , AUTODESK
0.61% , PUI , Utilities, PUI
6.53% , FHN , FIRST TENNESSEE
3.44% , ABT , ABBOTT LABS
1.59% , IYZ , Telecom DJ US, IYZ
1.89% , FPL , FPL GROUP INC
3.04% , LAMR , Lamar Advertising Company
4.94% , APOL , APOLLO GROUP
4.06% , OMX , OFFICEMAX INC., OMX
1.26% , IYH , Healthcare DJ, IYH
2.73% , EXPD , Expeditors International WA
3.32% , GILD , Gilead Sciences Inc
2.61% , MV , METAVANTE TECHNOLOGIES, MV
2.13% , NOVL , NOVELL
2.16% , XLV , Health Care SPDR, XLV
2.09% , HAS , HASBRO

Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol , Name
-2.66% , IACI , IAC/INTERACTIVCORP
-4.56% , SLV , Silver Trust iS, SLV
-1.75% , IXC , Energy Global, IXC
-5.44% , FCX , FREEPRT MCMORAN STK B
-3.47% , TUP , TUPPERWARE
-2.51% , XL , XL CAPITAL STK A
-0.92% , ADRD , Developed 100 BLDRS, ADRD
-3.46% , USO , Oil, Crude, U.S. Oil Fund, USO
-3.60% , SHLD , SEARS HOLDINGS
-2.58% , OIH , Oil Services H, OIH
-1.81% , MRVL , MARVELL TECHNOLOGY
-1.84% , VDE , Energy VIPERs, VDE
-2.99% , PXE , Energy Exploration & Prod, PXE
-2.95% , GLD , Gold Shares S.T., GLD
-0.78% , EZU , EMU Europe Index, EZU
-3.95% , XME , Metals & Mining SPDR, XME
-3.63% , RIG , TRANSOCEAN
-0.89% , EWI , Italy Index, EWI
-0.96% , LH , LAB CRP OF AMER
-1.74% , PHM , PULTE HOMES
-2.23% , WM , WASHINGTON MUT
-2.75% , IAU , Gold COMEX iS, IAU
-4.92% , EOG , EOG RESOURCES
-0.54% , EWG , Germany Index, EWG
-0.58% , SH , Short 100% S&P 500, SH
-2.73% , XLE , Energy SPDR, XLE
-0.69% , EWL , Switzerland Index, EWL
-0.61% , EWU , United Kingdom Index, EWU
-0.29% , PSI , Semiconductors, PSI
-2.31% , NSM , NATL SEMICONDUCT
-2.13% , NWS.A , NEWS CORP STK A
-1.06% , PXJ , Oil & Gas, PXJ
-1.64% , EWZ , Brazil Index, EWZ
-0.93% , PSQ , Short 100% QQQ, PSQ
-0.50% , PNW , PINNACLE WEST
-2.73% , NOV , NATIONAL OILWELL VARC0
-2.05% , MAR , MARRIOTT INTL STK A
-3.36% , RDC , ROWAN COMPANIES
-3.14% , SUN , SUNOCO

Sectors: among the 9 major U.S. sectors, 7 rose and 2 fell.
Major Sectors Ranked for the Day
% Price Change Sector

2.16% Health Care SPDR, XLV
1.94% Consumer Discretionary SPDR, XLY
1.79% Financial SPDR, XLF
1.07% Utilities SPDR, XLU
0.72% Technology SPDR, XLK
0.39% Industrial SPDR, XLI
0.39% Consumer Staples SPDR, XLP
-0.67% Materials SPDR, XLB
-2.73% Energy SPDR, XLE

Energy (XLE) Neutral, Market Weight. On 5/20/08, both the XLE price close and the XLE/SPY Relative Strength Ratio rose to new all-time highs, again confirming a major uptrend.

Materials (XLB) Neutral, Market Weight. On 5/20/08, XLB/SPY Relative Strength Ratio rose to another new all-time high. On 5/16/08, XLB price rose to another new all-time high. On 4/16/08, both the XLB price and the XLB/SPY Relative Strength Ratio rose to new all-time highs, confirming the major uptrend.

Utilities (XLU) Neutral, Market Weight. The XLU/SPY Relative Strength Ratio rose to a new 4-month high on 5/22/08. Since 10/17/02, the XLU/SPY Relative Strength Ratio has outperformed substantially. Since 5/15/08, the XLU/SPY Relative Strength Ratio has been rising again. So, Utilities have outperformed the S&P 500 both long term and short term.

Technology (XLK) Neutral, Market Weight. On 5/29/08, the XLK/SPY Relative Strength Ratio rose to another new 4-month high, confirming an improving intermediate-term trend.

Consumer Staples (XLP) Neutral, Market Weight. Since 3/28/08, the XLP/SPY Relative Strength Ratio has underperformed moderately.

Industrial (XLI) Neutral, Market Weight. Since 3/31/08, the XLI/SPY Relative Strength Ratio has underperformed moderately.

Health Care (XLV) Bearish, Underweight. Since 10/9/02, the XLV/SPY Relative Strength Ratio has underperformed substantially. On 5/15/08, the XLV/SPY Relative Strength Ratio fell to another new 6-year low, again confirming the existing Primary Bearish trend.

Consumer Discretionary (XLY) Bearish, Underweight. Since 1/5/05, the XLY/SPY Relative Strength Ratio has underperformed substantially. 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 5/28/08, the XLF/SPY Relative Strength Ratio fell to its lowest level in more than 7 years. Since 3/23/04, the XLF/SPY Relative Strength Ratio has underperformed substantially. On 3/17/08, both absolute price and the XLF/SPY Relative Strength Ratio fell to their lowest levels in nearly 5-years, again confirming a major Bearish trend.

Foreign stock indexes Relative Strength Ratio rose to a new 5-month high on 5/23/08. EFA outperformed since 2/8/08 and, longer term, since the major bottom on 3/12/03. EFA is the ETF representing the EAFE, the international developed country stock markets, ex the U.S. and Canada.

NASDAQ Composite price outperformed since 3/3/08. Longer term, the relative trends in larger time frames are not encouraging, however. The NASDAQ underperformed from 11/7/07 to 3/3/08, when the Relative Strength Ratio fell to a new 9-month low, thereby confirming downtrends in larger time frames.

Growth Stock/Value Stock Relative Strength Ratio rose to another new 3-year high on 5/28/08. Long term, the Growth/Value ratio (IWF/IWD) has been in an uptrend since 8/8/06.

The Small Cap/Large Cap Relative Strength Ratio outperformed since 3/10/08. The Relative Strength Ratio is still in a downtrend since the peak on 4/19/06, however, so the main long-term trend has NOT YET confirmed the improved intermediate-term trend for Small Caps.

Crude Oil July futures reversed to the downside. On 5/28/08, I noted that Crude Oil has been quite overbought, so a consolidation or correction would come as no surprise. 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 June futures contract broke down below the lows of the previous 8 trading days. Gold’s trend has turned Bearish, for both short-term and intermediate-term time frames.

Silver is still lagging Gold. Silver sharply underperformed Gold since 3/5/08. In addition, iShares Silver Trust (AMEX: SLV) has been relatively weak compared to Gold longer term, since 12/7/06. Finally, for the past 28 years, since 1/2/80, Silver has underperformed Gold.

The Gold Miners ETF (GDX) / Gold Bullion Relative Strength Ratio underperformed Gold since 10/31/07. Longer-term, GDX significantly underperformed Gold since 10/31/07. Therefore, GDX trends are Bearish relative to Gold itself.

U.S. Treasury Bond futures prices broke down further to lower 7-month price lows. On 5/28/08, I noted a significant Bearish trend change for Bonds and suggested that traders in all timeframes ought to consider selling bonds.

The U.S. dollar broke out above the highs of the previous 7 trading days. The day-to-day trend appears to have improved for the very short-term, but the long-term Primary Tide trend is still Bearish.

The Art of Contrary Thinking: Traders need to be extremely nimble to keep up with rapid changes in the mass mood of late. The business and financial news has flipped from fear to hope and back again many times in recent months, creating an extremely choppy trading environment. 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, without warning, risk control becomes more important than aggressive profit seeking. Stay flexible.

Sentiment/Contrary Opinion: There were 37.9% Bulls versus 32.2% Bears as of 5/28/08, according to the weekly Investors Intelligence survey of newsletter advisors. The Bull/Bear ratio fell to 1.18, down from 1.54 the previous week. The ratio’s 38-year range is 0.28 to 17.51, and the median is 1.47.

VIX “Fear Index” is now at 18.14 and falling, indicating decreasing Fear. VIX fell from a peak of 32.64 on 3/17/08 to a low of 16.30 on 5/15/08. The all-time high was 45.74 on 10/8/98. The all-time low was 9.89 on 1/24/07. 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” is now at 21.28 and falling, indicating decreasing Fear. VXN fell from a peak of 35.63 on 1/22/08 to a low of 20.00 on 5/16/08. The all-time high was 114.23 on 10/8/98. The all-time low was 12.61 on 7/29/05. VXN measures NASDAQ Volatility using a method comparable to that used for VIX.

CBOE Put/Call Ratio is 0.67, which indicates normal 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 1.30, which indicates mildly Bearish sentiment. The ratio’s 4-year simple moving average is 1.50, 4-year median is 1.47, and 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 weakened.

A Secondary Reaction was signaled on 4/18/28, when the Dow-Jones Industrials and Transports both closed at 3-month highs. But the Primary Tide Major Trend still may be Bearish. On 5/19/08, the Transports tested their all-time high and failed to make a new high. Meanwhile, the Industrials languished far below their highs. Following such failure to advance, a downside test should follow. 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.

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 (1,398.26):

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
1,440.24, high of 5/19/08

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 (1,398.26):