By Robert W. Colby, Senior Analyst TraderPlanet.com
New Closing Highs for Some Cap-Weighted Indexes, While Other Indexes Lag
On Wednesday, major U.S. stock price indexes gapped down in response to overnight news of a 6.50% plunge in the Shanghai stock market, reminding traders of the correction that hit in February. In a matter of minutes, the sell-off was over. Showing impressive resilience in the face of bad news, the market rallied most of the day and closed on an upswing, up and very near the best levels of the day.
Foreign, REIT, and Energy stocks led the way higher.
The Standard & Poor’s 500 cash index (1,530.23) closed at a new all-time closing price high, confirmed by a new high in the DJIA, Russell Indexes (1000, 2000, and 3000), and the S&P 1500.
Trading volume rose substantially to relatively high levels, which normally ought to be a good confirmation of price trend strength.
The Advance-Decline balance was Bullish on the NYSE but much less Bullish on the NASDAQ. The Cumulative Daily Advance-Decline Line for the NYSE rose to a new high, but the A-D line for the NASDAQ is lagging far behind.
The SPDR S&P 500 ETF (AMEX: SPY), which fairly represents actual trading in the capitalization weighted general stock market, failed to confirm the S&P 500 cash index by also making a new all-time closing high. On 5/24/07, the SPY broke down decisively below the uptrend line rising from the low of 3/14/07 and remains below it.
Various momentum oscillators moved up moderately but did not move above their peaks from late April-early May. Since then, 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 most days–even as price made higher highs. MACD crossed under its trailing Signal Line on 5/10/07 and remains below it. Despite Wednesday’s big upturn in the price indexes, MACD turned up only very slightly.
Mergers and acquisitions, leveraged buyouts, and corporate stock buybacks are major Bullish drivers of the Bull market for stocks. On Wednesday, Biogen Idec (BIIB) and Viacom (VIA.B) both approved stock buybacks. IBM (IBM) rose after announcing that it bought back 8% of its outstanding shares, and that would increase earining. CDW Corp (CDWC) confirmed that it will go private. CDWC was previously highlighted on this page for extraordinary positive price and trading volume change.
Here is a stock screen I designed 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
7.48% , GRMN , GARMIN LTD
5.93% , BIIB , BIOGEN IDEC
3.51% , NIHD , NII Holdings, Inc.
1.48% , VIA , VIACOM INC. (New)
0.88% , DSV , Value Small Cap DJ, DSV
2.68% , VNQ , REIT VIPERs, VNQ
4.30% , URBN , Urban Outfitters Inc.
5.33% , EP , EL PASO
4.15% , COH , COACH
3.65% , APA , APACHE
3.87% , AAPL , APPLE COMPUTER
3.10% , RHT , Red Hat Inc.
3.60% , CAT , CATERPILLAR
3.37% , SCHW.O , CHARLES SCHWAB
2.48% , CDWC , CDW Corporation
0.61% , DSG , Growth Small Cap DJ, DSG
0.77% , TMW , Wilshire 5000 ST TM, TMW
2.43% , LVLT , LEVEL 3 COMMUNICATIONS
0.68% , KLD , LargeCap Blend Socially Responsible iS, KLD
2.77% , GLW , CORNING
4.74% , PLD , PROLOGIS TRUST
3.01% , SNDK , SanDisk Corporation
2.01% , HLT , HILTON HOTELS
1.42% , PKB , Building & Construction, PKB
3.16% , EMC , EMC
3.16% , S , SPRINT NEXTEL
3.26% , CTSH , Cognizant Technology Solutions
2.23% , MWV , MEADWESTVACO
3.67% , BIG , BIG LOTS
0.88% , IYY , LargeCap Blend Total Market DJ, IYY
0.72% , ISI , LargeCap Blend S&P 1500 iS, ISI
0.32% , IBB , Biotechnology, IBB
0.90% , JKJ , SmallCap Core iS M, JKJ
1.20% , AVY , AVERY DENNISON
1.80% , VMC , VULCAN MATERIALS
1.41% , CEPH , Cephalon Inc
3.23% , EXC , EXELON CORP
1.58% , AOC , AON
2.40% , MCO , MOODYS CORP
2.08% , BA , BOEING
0.81% , IWW , Value LargeCap Russell 3000, IWW
3.44% , NE , NOBLE
2.83% , TROW , T ROWE PRICE GP
1.73% , IGE , Natural Resource iS GS, IGE
0.81% , RSP , LargeCap Blend S&P=Weight R, RSP
1.73% , SHLD , SEARS HOLDINGS
1.97% , DJ , DOW JONES
1.06% , AEP , AM ELEC POWER
1.40% , LBTYA , Liberty Global Inc. (LBTYA)
1.67% , KO , COCA COLA
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-7.81% , NI , NISOURCE
-2.57% , MAT , MATTEL
-2.43% , CIEN.O , CIENA
-2.51% , RYAAY , Ryanair Holdings plc
-1.72% , MXIM , MAXIM INTEGRATED
-0.82% , DOG , Short 100% Dow 30, DOG
-1.35% , NVLS , NOVELLUS SYS
-0.66% , LNC , LINCOLN NATL
-1.66% , SDS , Short 200% S&P 500 PS, SDS
-0.88% , UST , UST
-0.45% , MTG , MGIC INVESTMENT
-2.27% , MZZ , Short 200% MidCap 400 PS, MZZ
-1.34% , NOVL , NOVELL
-1.85% , QID , Short 200% QQQ PS, QID
-1.07% , VC , VISTEON
-0.47% , PAYX , PAYCHEX
-1.46% , AMAT , APPLIED MATERIAL
-1.21% , DXD , Short 200% Dow 30 PS, DXD
-1.29% , MRK , MERCK & CO
-0.68% , ZMH , ZIMMER HLDGS
-0.59% , WMI , WASTE MANAGEMENT
-0.96% , IGT , INTL GAME TECH
-0.73% , LLTC , LINEAR TECH
-0.04% , XBI , Biotech SPDR, XBI
-0.69% , SMH , Semiconductor H, SMH
-0.25% , PPH , Pharmaceutical H, PPH
-0.80% , MIL , MILLIPORE
-3.30% , QCOM , QUALCOMM
-0.46% , HUM , HUMANA
-1.71% , FRX , FOREST LABS STK A
-0.80% , XRAY , DENTSPLY International Inc
-1.43% , ABT , ABBOTT LABS
-0.28% , BMET , BIOMET
-0.54% , TER , TERADYNE
-0.68% , WPI , WATSON PHARM
-0.54% , PFE , PFIZER
-1.13% , SANM , SANMINA
-0.73% , CTB , COOPER TIRE
-1.03% , ABK , AMBAC FINL GRP
-0.98% , ABI , Applera Corp-Applied Biosystems Group (ABI)
-1.05% , TEVA , Teva Pharmaceutical Industries Limited
-0.37% , LLY , ELI LILLY
-0.43% , DISH , EchoStar Communications Corporation
-0.19% , MER , MERRILL LYNCH
-0.49% , HAS , HASBRO
-0.99% , INTC , INTEL
-0.06% , EWI , Italy Index, EWI
-0.75% , MCD , MCDONALDS
-0.12% , IYH , Healthcare DJ, IYH
-0.64% , SH , Short 100% S&P 500, SH
The ratio of the EAFE (international developed country stock markets, ex the U.S. and Canada) relative to the S&P 500 has been lagging since 4/12/07, and EAFE underperformed again. The short-term correction could extend. In the bigger picture, foreign stocks outperformed U.S. stocks since the Bull Market started in 2002, and that is a powerful major trend that continues.
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 turned down, and the larger trends remain Bearish.
The ratio of Small Cap stocks relative to Large Caps (Russell 2000/Russell 1000) has been heading down since 4/19/06, so the major trend is Bearish for Small Caps relative to Large Caps. This ratio of Small Cap stocks relative to Large Caps fell even though Small Caps rose to a new high on price alone.
Semiconductor HOLDERS (SMH) fell to the May low on rising volume, a Bearish sign.
The U.S. OIL FUND ETF (AMEX: USO), which reflects the market price of crude oil futures, fell to its lowest closing price level since 5/10/07. That ought to be Bearish.
The Energy Select Sector SPDR ETF (XLE) rose to a new all-time high close. XLE outperformed USO again, as usual. 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 continuing trend.
StreetTRACKS Gold Trust ETF (NYSE: GLD), which reflects the market price of gold futures, fell to a new two-month closing price low, confirming again an ongoing and significant downside correction.
iShares Silver Trust (AMEX: SLV) rose to its highest close in two weeks, suggesting a possible short-term recovery mode. But the larger silver trend looks like a trading range since the top on 5/11/06.
The Gold Miners Index (XAU) rose slightly but still has been underperforming GLD since 4/16/07. Longer term, XAU has underperformed GLD since 5/31/1996. Apparently, XAU remains out of favor.
iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT) rose slightly, but on 5/29/07 TLT fell to its lowest price since 8/15/06, confirming the main trend as Bearish.
The U.S. dollar rose to its highest closing price since 4/11/07, thereby reviving hope of a resumption of the short-term rally attempt that started on 5/1/07. Long-term trends remain Bearish. 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:
2.38% Oil Services
1.55% Commodity Related
1.55% Natural Gas
1.53% Broker Dealers
1.29% Disk Drives
1.11% S&P Mid Caps
1.05% Computer Tech
0.96% Nasdaq 100
0.91% Consumer Discretionary
0.88% South Korea
0.84% Hong Kong
0.83% Dow Industrial
0.82% Russell 1000
0.82% Wilshire 5000
0.81% Dow Utilities
0.81% Russell 3000
0.80% Nasdaq Composite
0.80% S&P 500
0.76% S&P 100
0.73% Dow Composite
0.72% NYSE Composite
0.72% Value Line
0.69% Russell 2000
0.68% S&P Small Caps
0.52% Dow Transports
0.48% Gold Mining
0.47% Consumer Staples
0.46% Australian Dollar
0.41% AMEX Composite
0.40% United Kingdom
0.16% Health Care Products
0.13% US Dollar Index
0.06% 30Y T-Bond
0.03% Health Care
0.01% Japanese Yen
-0.10% Swiss Franc
-0.11% Canadian Dollar
-0.14% Health Care
-0.22% Euro Index
-0.27% British Pound
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.