Daily Stock Market Commentary – 6/07/2007

VIX “Fear Index” pops up. An overdue correction–here at last? Foreign Stocks hit hardest. Short-term momentum plunges steeply. Bonds and Utilities fall further. U.S. dollar weakening. This update has been warning of rising interest rates for weeks. On Wednesday, it seems that everyone else suddenly woke up to the fact.

The Advance-Decline balance was very Bearish again for the second day in a row on both the NYSE and NASDAQ.

Trading volume was relatively high, on both on the NYSE and NASDAQ, thereby confirming the downside correction and suggesting significant selling pressure on stocks.

Short-term momentum oscillators fell sharply to their lowest levels in nearly two months. When the general market price indexes were rising to new highs as recently as 6/4/07, MACD, RSI, and Stochastics were unable to rise to their peaks from late April-early May. Momentum oscillators were overbought and then diverged Bearishly from price, thereby giving warning that the time for a consolidation or correction might be approaching.

Spotlight on event stocks: 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.

Sectors: Among the nine major U.S. sectors, all nine fell. Utilities were the standout on the downside again, falling 1.59% this time.

Utilities broke down. The Dow-Jones Utility Average fell steeply to a new nine-week closing price low. Utilities are below their 50-day moving average and have been relatively weak since 5/22/07.

Foreign Stocks hit hardest. Seven foreign stock markets were the biggest losers, falling 1.99% to 2.69%. The ratio of the EAFE (international developed country stock markets, ex the U.S. and Canada) relative to the S&P 500 fell relatively steeply on fears of rising interest rates and Bearish talk by a big broker. But no MAJOR damage was done. 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.

NASDAQ stocks remain weaker than the S&P, long term. The ratio of the NASDAQ Composite relative to the S&P 500 fell to a new seven-month low on 5/17/07, confirming the long term relative Bearish downtrend in force since 3/10/00.

Growth Stocks remain Bearish relative to Value stocks. The ratio of Growth stocks relative to Value stocks turned down on Wednesday, and the larger trends remain down.

Small Caps have Bearish major trends. The ratio of Small Cap stocks relative to Large Caps (Russell 2000/Russell 1000) fell slightly. In longer-term perspective, the ratio has been heading down since 4/19/06, so the major trend is Bearish for Small Caps relative to Large Caps.

Semiconductors are still underperforming. Semiconductor HOLDERS (SMH) fell over the past three sessions after recovering about half of its loss from its May peak, which was a normal bounce. The Semiconductor industry group has been underperforming for more than seven years, so the relative major trend remains Bearish.

Crude Oil is consolidating. USO rose slightly. It has been chopping up and down in a trading range since February. Previous lows at 47.30-47.39 appear to be offering technical support. Resistance appears in the 51-52 zone. The USO cyclical trend has been Bearish since USO peaked at 73.29 on 7/13/06. The U.S. OIL FUND ETF (AMEX: USO) is a good indicator for the market price of crude oil futures.

Energy Stocks are pausing in their uptrends. XLE eased moderatly lower over the past two trading sessions but remains in a strong major uptrend. 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. XLE is the Energy Select Sector SPDR ETF.

Gold was little changed, remains corrective. StreetTRACKS Gold Trust ETF (NYSE: GLD), which reflects the market price of gold futures, previously recovered nearly half of April-May losses, which is normal for a countertrend bounce against a larger downtrend. GLD fell to a new two-month closing price low on 5/30/07, thereby confirming again an ongoing and significant downside correction.

Silver has been stronger than Gold. iShares Silver Trust (AMEX: SLV) fell only slightly, and it has been rising relative to gold over the most recent few weeks. But on an absolute basis, the larger silver trend looks like a trading range since the top on 5/11/06.

Gold Mines fell three days in a row. The Gold Miners Index (XAU) has underperformed GLD since 5/31/1996, with no clear end in sight.

Inflation Expections Rising. The ratio of the price of bond TIPS to 10-year U.S. Treasury Notes rose slightly after scoring a new eight-month high on 6/4/07. This ratio has been rising since 1/16/07, thereby indicating a trend toward rising inflation expectations.

Bond prices fell again. On 6/6/07, TLT broke down to another new nine-month low, the lowest since August, 2006. The main trend is Bearish for iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT).

U.S. dollar continues down. On 6/6/07, the dollar moved down further to its lowest close in three weeks. The dollar has been in a major Bearish trend for nearly six years, since it peaked out at 121.29 on 7/5/2001.

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

0.47% Australian Dollar
0.37% Canadian Dollar
0.29% Japanese Yen
0.21% Broker Dealers
0.05% Swiss Franc
0.02% British Pound
-0.01% US Dollar Index
-0.03% 30Y T-Bond
-0.07% Disk Drives
-0.13% Insurance
-0.16% Euro Index
-0.20% Taiwan
-0.37% Hardware
-0.41% Japan
-0.55% AMEX Composite
-0.61% REITs
-0.65% Consumer Staples
-0.71% Airlines
-0.77% Internet
-0.77% Hong Kong
-0.81% S&P 100
-0.83% Russell 2000
-0.83% Health Care Products
-0.85% Financial
-0.85% Retailers
-0.89% S&P 500
-0.89% Gold Mining
-0.90% Banks
-0.91% Nasdaq 100
-0.91% Wilshire 5000
-0.92% Nasdaq Composite
-0.93% Russell 3000
-0.93% Health Care
-0.93% Commodity Related
-0.93% Health Care
-0.94% Drugs
-0.95% Dow Industrial
-0.95% Russell 1000
-0.96% Hospitals
-0.99% Paper
-1.03% Computer Tech
-1.05% Network
-1.06% NYSE Composite
-1.06% Value Line
-1.07% S&P Small Caps
-1.07% Industrial
-1.13% Semiconductors
-1.17% Technology
-1.17% Singapore
-1.18% DOT
-1.24% S&P Mid Caps
-1.27% Consumer Discretionary
-1.28% Dow Composite
-1.28% Energy
-1.28% Canada
-1.29% Materials
-1.30% Dow Utilities
-1.35% Biotechs
-1.40% Australia
-1.40% South Korea
-1.41% Malaysia
-1.46% Natural Gas
-1.46% Italy
-1.47% Netherlands
-1.50% Oil
-1.52% Chemicals
-1.55% Oil Services
-1.59% Utilities
-1.68% United Kingdom
-1.76% Dow Transports
-1.86% France
-1.91% Switzerland
-1.99% Belgium
-2.04% Sweden
-2.46% Austria
-2.64% Spain
-2.66% Germany
-2.66% Mexico
-2.69% Brazil

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

Periodic downside shakeouts are normal, and one may have started just this week. The world is a volatile place where the unexpected is always possible, so stocks are never without risk.

Longer term, 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.

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.