Daily Stock Market Commentary – 6/01/2007

Dow Theory Confirms Bull Market, But Momentum Does Not. Mergers and acquisitions, leveraged buyouts, and corporate stock buybacks remain the major Bullish drivers of the Bull market for stocks.

On Thursday, major U.S. stock price indexes gapped higher on the open in response to still more overnight news of mergers and acquisitions, leveraged buyouts, and corporate stock buybacks. Prices peaked within the first 20 minutes and spent the balance of the day in a choppy pattern heading downward.

The SPDR S&P 500 ETF (AMEX: SPY), which fairly represents actual trading in the capitalization weighted general stock market, closed on the minus side and lower than it opened, thereby forming a dark Spinning Top, which implies exhaustion for this short-term upmove. Again, the SPY 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.

Trading volume on both on the NYSE and NASDAQ rose substantially to very high levels. Combining such active trading with the day’s price pattern, one might deduce aggressive selling into the early rally.

Although the Dow-Jones Industrial Average closed slightly lower, the Dow Theory just now confirmed a Primary Tide Bull Market. It happened when both the Dow-Jones Industrial Average and the Dow-Jones Transportation Average closed at new all-time highs closing price levels on Wednesday and Thursday this week.

The Standard & Poor’s 500 cash index (1,530.62) closed at another new all-time closing price high, confirmed by a new closing price high in the S&P 500 Equal Weight Composite, Russell Indexes (1000, 2000, and 3000), the S&P 1500, DJTA, and EAFE.

The following indexes are lagging and did not close at new highs: DJ Industrials and Utilities, NASDAQ Composite, Value Line Geometric.

The Advance-Decline balance was moderately Bullish, both on the NYSE and 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.

Most short-term momentum oscillators moved down moderately after failing to surpass 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.

Mergers and acquisitions, leveraged buyouts, and corporate stock buybacks are major Bullish drivers of the Bull market for stocks. On Thursday came news that Wachovia is acquiring A.G. Edwards, Morgan Stanley is acquiring Investa Property Group, and Ceridian agreed to be taken private.

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.

Among the nine major U.S. sectors, seven rose and two fell. None moved more than 1.00%.

The ratio of the EAFE (international developed country stock markets, ex the U.S. and Canada) relative to the S&P 500 moved higher, but still it lags since 4/12/07. Absolute price of the EAFE made a new high. 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 has been moving up since 5/17/07 but remains in a downtrend for the longer term. 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 up, but the larger trends remain Bearish.

The ratio of Small Cap stocks relative to Large Caps (Russell 2000/Russell 1000) turned up, but in the larger picture it has been heading down since 4/19/06, So, the major trend is Bearish for Small Caps relative to Large Caps.

Semiconductor HOLDERS (SMH) rose but volume fell. The Semiconductor industry group has been underperforming for more than seven years, so the relative major trend remains Bearish.

The U.S. OIL FUND ETF (AMEX: USO), which reflects the market price of crude oil futures, bounced up after testing a previous lows at 47.30-47.39 set in February and early May, 2007. That level might be offering technical support, at least temporarily. The USO cyclical trend has been Bearish since USO peaked at 73.29 on 7/13/06.

The Energy Select Sector SPDR ETF (XLE) rose to a new all-time high intraday but reversed to close down on the day. XLE underperformed USO, for a change. Since 3/2/07, the stocks of the oil companies have been much stronger than oil as a commodity, and that still looks like an important continuing trend.

StreetTRACKS Gold Trust ETF (NYSE: GLD), which reflects the market price of gold futures, recovered some lost ground after falling to a new two-month closing price low on 5/30/07, thereby confirming again an ongoing and significant downside correction.

iShares Silver Trust (AMEX: SLV) rose to its highest close in three weeks, confirming a 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 strongly. XAU has outperformed GLD since 4/30/07. Longer term, XAU has underperformed GLD since 5/31/1996. So, XAU shows a conflict between relative price trends in different time frames.

The ratio of the price of bond TIPS to 10-year U.S. Treasury Notes rose moderately. It has been rising since 1/16/07, generally, thereby indicating a trend toward rising inflation expectations.

iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT) fell on high volume. On 5/29/07 TLT fell to its lowest price since 8/15/06, confirming the main trend as Bearish.

The U.S. dollar formed a Bearish Engulfing Line, which is a negative for 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:

2.79% Broker Dealers
2.73% Gold Mining
1.91% Germany
1.74% Network
1.42% Semiconductors
1.16% Australia
1.13% Dow Transports
1.13% South Korea
0.97% Japan
0.91% Paper
0.91% France
0.85% Disk Drives
0.83% Internet
0.83% Austria
0.78% Retailers
0.72% Spain
0.63% Australian Dollar
0.60% Sweden
0.56% S&P Mid Caps
0.54% Industrial
0.53% Nasdaq 100
0.52% Hospitals
0.49% Materials
0.48% AMEX Composite
0.48% DOT
0.48% Hong Kong
0.47% S&P Small Caps
0.47% Technology
0.46% Nasdaq Composite
0.45% Russell 2000
0.45% Hardware
0.44% Switzerland
0.43% Netherlands
0.41% Value Line
0.40% Dow Composite
0.35% Canadian Dollar
0.34% Dow Utilities
0.29% Computer Tech
0.26% Utilities
0.26% Commodity Related
0.25% Consumer Discretionary
0.25% Biotechs
0.25% Belgium
0.22% Health Care
0.22% Singapore
0.22% Euro Index
0.19% Health Care Products
0.19% British Pound
0.17% Brazil
0.15% NYSE Composite
0.14% Wilshire 5000
0.14% Consumer Staples
0.14% Health Care
0.14% Italy
0.14% Taiwan
0.12% Chemicals
0.11% Russell 3000
0.10% Drugs
0.08% Russell 1000
0.08% Airlines
0.03% S&P 500
0.02% Swiss Franc
0.01% Insurance
0.00% Malaysia
0.00% 30Y T-Bond
-0.03% Mexico
-0.04% Dow Industrial
-0.04% United Kingdom
-0.08% S&P 100
-0.10% Canada
-0.15% Oil
-0.18% US Dollar Index
-0.19% Japanese Yen
-0.26% REITs
-0.29% Financial
-0.32% Banks
-0.48% Natural Gas
-0.51% Energy
-0.70% Oil Services

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.