By Robert W. Colby, Senior Analyst

Extreme Weakness…Near Panic Conditions…Selling Climax?

Short-term stock market price and breadth momentum plunged. S&P 500 hit a new five-week low in heavy trading. Bond prices collapsed to new eleven-month low on a Bearish Breakaway Gap. Utilities down 3.11% in just one day. VIX “Fear Index” jumped to 17.06 from 12.78 last week. Rising interest rates are suddenly the talk of the town.

The Advance-Decline balance was EXTREMELY Bearish on both the NYSE and NASDAQ, signaling selling climax conditions. Suddenly, the NYSE A-D line is at a new five-week low, and the NASDAQ A-D line is at a new three-week low.

Trading volume was EXTREMELY heavy, on both on the NYSE and NASDAQ, suggesting near selling panic conditions.

Short-term momentum oscillators have collapsed this week. They show extremely Bearish price velocity. 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 diverging 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.

Bullish Stocks: Rising Price and Rising Volume
% Price Change, Symbol, Name

4.69% , DGX , QUEST DIAG
1.51% , PSQ , Short 100% QQQ, PSQ
2.00% , MYY , Short 100% MidCap 400, MYY
3.08% , BMET , BIOMET
3.58% , SDS , Short 200% S&P 500 PS, SDS
3.04% , DXD , Short 200% Dow 30 PS, DXD
3.25% , QID , Short 200% QQQ PS, QID
4.10% , MZZ , Short 200% MidCap 400 PS, MZZ
0.86% , CVS , CVS

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

-1.72% , XSD , Semiconductor SPDR, XSD
-1.97% , VBK , Growth SmallCap VIPERs, VBK
-1.75% , IXC , Energy Global, IXC
-2.49% , BDH , Broadband H, BDH
-1.93% , EFG , Growth EAFE MSCI, EFG
-2.78% , XBI , Biotech SPDR, XBI
-6.02% , HGSI , Human Genome Sciences Inc
-2.03% , RFG , Growth MidCap S&P 400, RFG
-1.94% , IYY , LargeCap Blend Total Market DJ, IYY
-2.43% , EZA , South Africa Index, EZA
-2.23% , IJK , Growth MidCap 400 B, IJK
-1.73% , IGN , Networking, IGN
-2.76% , EWK , Belgium Index, EWK
-2.18% , JKK , Growth SmallCap iS M, JKK
-2.90% , WYNN , Wynn Resorts L
-3.21% , RWR , REIT Wilshire, RWR
-1.69% , OEF , LargeCap Blend S&P 100, OEF
-2.70% , EWL , Switzerland Index, EWL
-3.42% , PCG , PG&E
-2.01% , KCE , Capital Markets KWB ST, KCE
-4.19% , JCP , JC PENNEY
-1.88% , DSG , Growth Small Cap DJ, DSG
-3.42% , UTH , Utilities H, UTH
-1.64% , IYH , Healthcare DJ, IYH
-2.42% , IGV , Software, IGV
-1.75% , JKJ , SmallCap Core iS M, JKJ
-1.85% , IGW , Semiconductor iS GS, IGW
-1.80% , ISI , LargeCap Blend S&P 1500 iS, ISI
-5.04% , PHM , PULTE HOMES
-3.46% , IDU , Utilities DJ, IDU
-1.79% , TLT , Bond, 20+ Years Treasury, TLT
-3.14% , VNQ , REIT VIPERs, VNQ
-1.11% , IAH , Internet Architecture H, IAH
-3.92% , TBH , Telebras H, TBH
-2.01% , JKL , Value SmallCap iS M, JKL
-1.67% , IYF , Financial DJ US, IYF
-2.91% , ILF , Latin Am 40, ILF
-1.75% , ONEQ , Growth LargeCap NASDAQ Fidelity, ONEQ
-1.51% , DGT , Global Titans, DGT
-1.91% , TTH , Telecom H, TTH
-4.11% , ETR , ENTERGY
-2.04% , IJR , SmallCap S&P 600, IJR
-1.78% , TMW , Wilshire 5000 ST TM, TMW

Sectors: a complete rout. Among the nine major U.S. sectors, all nine fell more than 1%.

Utilities plunge 3.11% to a new 11-week low. Utilities have been relatively weak since 5/22/07.

Foreign Stocks were hit hard again. Several foreign stock markets were among the biggest losers, falling 3% to 4%. But the ratio of the EAFE (international developed country stock markets, ex the U.S. and Canada) relative to the S&P 500 actually rose slightly, meaning that the EAFE fell less than the S&P percentage wise. 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, both short term and 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, continued down on Thursday, and the larger trends remain down.

Small Caps have Bearish minor and major trends. The ratio of Small Cap stocks relative to Large Caps (Russell 2000/Russell 1000) fell again. 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 plunged to a new seven-week low. Semiconductor HOLDERS (SMH) fell over the past four 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 rose to a new five-week high, intraday. USO has been chopping up and down in a trading range since February, and it is still stuck in that range. 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 fell, but no major damage. XLE moved moderately lower over the past three 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, not every day but most of the time, and that still looks like an important continuing trend. XLE is the Energy Select Sector SPDR ETF.

Gold plunged steeply, 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 turned down. iShares Silver Trust (AMEX: SLV) had been rising relative to gold since 5/24/07 but reversed on 6/6/07. On an absolute price basis, the larger silver trend looks like a trading range since the top on 5/11/06.

Gold Mines relative to GLD plunged to a new six-week low. 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 jumped up to a new nine-month high on 6/7/07. This ratio has been rising since 1/16/07, thereby indicating a trend toward rising inflation expectations.

Bond prices collapsed on a Bearish Breakaway Gap. On 6/7/07, TLT broke down to a new eleven-month low, the lowest since July, 2006. The main trend is Bearish for iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT).

U.S. dollar reversed three-day downtrend to close sharply higher. Nevertheless, 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:

0.53% US Dollar Index
0.13% Australian Dollar
-0.06% Japanese Yen
-0.41% Disk Drives
-0.41% Japan
-0.44% South Korea
-0.46% Canadian Dollar
-0.54% Euro Index
-0.60% Hardware
-0.66% Swiss Franc
-0.68% Australia
-0.79% Hospitals
-0.81% British Pound
-1.09% Taiwan
-1.15% Insurance
-1.18% 30Y T-Bond
-1.27% Consumer Staples
-1.28% Banks
-1.38% Oil
-1.42% Technology
-1.48% Dow Industrial
-1.49% Health Care
-1.59% Health Care
-1.61% S&P 100
-1.63% Industrial
-1.63% Computer Tech
-1.63% Network
-1.63% United Kingdom
-1.64% Drugs
-1.68% Financial
-1.68% Semiconductors
-1.71% Nasdaq 100
-1.75% Chemicals
-1.76% NYSE Composite
-1.76% S&P 500
-1.77% Nasdaq Composite
-1.77% Energy
-1.77% Health Care Products
-1.78% Wilshire 5000
-1.79% Russell 1000
-1.79% DOT
-1.80% Russell 3000
-1.80% Hong Kong
-1.83% Netherlands
-1.87% Value Line
-1.87% Consumer Discretionary
-1.89% Russell 2000
-1.89% S&P Small Caps
-1.91% Paper
-1.94% Retailers
-1.95% Internet
-2.04% Oil Services
-2.08% Commodity Related
-2.10% S&P Mid Caps
-2.14% Dow Composite
-2.18% AMEX Composite
-2.24% Materials
-2.28% Airlines
-2.33% Canada
-2.37% Italy
-2.40% Dow Transports
-2.54% Mexico
-2.64% Natural Gas
-2.69% Broker Dealers
-2.70% Germany
-2.70% Malaysia
-2.70% Switzerland
-2.76% Belgium
-2.79% France
-2.80% Spain
-3.00% Biotechs
-3.01% Austria
-3.05% REITs
-3.10% Singapore
-3.11% Utilities
-3.26% Dow Utilities
-3.38% Gold Mining
-3.77% Sweden
-3.96% Brazil

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

Periodic downside shakeouts are normal, and a typical one appears to have started this week.

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. Although that alone does not mean that stocks cannot continue to trend higher, nevertheless, it is good to remember that “no tree grows to the sky.”