Daily Stock Market Commentary – 6/12/2007

Bond prices fell further. Inflation expectations are in a rising trend. Short-term stock market momentum remains in disarray, “needs work”. The VIX “Fear Index” eased, but that does not mean that the decline is over.

Stocks closed mixed in dull trading after a mid-session rally attempt fizzled.

Trading volume fell substantially, on both on the NYSE and NASDAQ, suggesting much less power behind the buying than behind the previous selling.

The Advance-Decline balance was neutral on both the NYSE and NASDAQ, following selling climax conditions on 6/7/07, when the NYSE A-D line plunged to a new five-week low, and the NASDAQ A-D line hit a new three-week low.

Short-term momentum oscillators stalled out as the rally attempt fizzled. They remain in disarray, suggesting tough bottom testing may lie ahead. When the general market price indexes were rising to new highs as recently as 6/4/07, oscillators such as MACD, RSI, and Stochastics were unable to rise to their peaks from late April-early May. That means that momentum oscillators were diverging Bearishly from price, thereby giving warning that the time for a consolidation or correction might be approaching.

Spotlight on event stocks: There was a rare setback in the active M&A zone as ThyssenKrupp denied talks to acquire U.S. Steel. 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.

Sectors: among the nine major U.S. sectors, seven rose and two fell.

Energy (XLE) was strong again. The major trend looks Bullish, since XLE has been relatively strong compared to the S&P since 3/12/03. Overweight.

Materials (XLB) turned down. XLB looks technically weak short-term. But the major trend still looks Bullish, since XLB has been relatively strong compared to the S&P since 9/27/00. Overweight for the long term.

Industrial (XLI) rose slightly. The major trend looks Bullish, since XLI has been relatively strong compared to the S&P since 8/9/06. Overweight.

Financial (XLF) bounced moderately higher. XLF has been relatively weak compared to the S&P since 3/23/04. Underweight.

Technology (XLK) rose slightly. XLK has been relatively strong compared to the S&P since 4/20/07, but XLK has been relatively weak compared to the S&P since 3/10/00. Marketweight until XLK makes up its mind.

Consumer Staples (XLP) rose slightly. XLP has been relatively weak compared to the S&P since 10/9/02. Underweight.

Utilities (XLU) bounced nicely on the day but recovered only a fraction of recent losses. XLU has been relatively weak compared to the S&P since 9/20/01. Underweight.

Health Care (XLV) fell again, continuing its persistent downtrend. XLV has been relatively weak compared to the S&P since 10/9/02. Underweight.

Consumer Discretionary (XLY) ) fell again. XLY has been relatively weak compared to the S&P since 1/5/05. Underweight.

Foreign Stocks bounced. Several foreign stock markets were among the biggest winners on the day, rising close to 1%. The ratio of the EAFE (international developed country stock markets, ex the U.S. and Canada) relative to the S&P 500 has risen since 5/21/07, meaning that the EAFE has outperformed the S&P 500. 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 have been weaker than the S&P, both short- 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, thereby 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 again on 6/5/07, and the larger trends have been Bearish for seven years.

Small Caps have Bearish minor and major trends. The ratio of Small Cap stocks relative to Large Caps (Russell 2000/Russell 1000) has been trending down for more than a week. 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 turned down. Semiconductor HOLDERS (SMH) have been in a declining trend since 5/14/07. In the larger perspective, the Semiconductor industry group has been underperforming for more than seven years, so the relative major trend remains Bearish.

Crude Oil rallied weakly on lower volume. Last week, oil fell sharply after hitting resistance in the 51-52 zone. 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 bounced. XLE moved moderately higher relative to USO. 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 recovered slightly, but it was an inside day, suggesting consolidation. Last week, GLD broke below April-May lows, confirming again an ongoing and significant downside correction. 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.

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

Gold Mines recovered slightly but underperformed GLD. The Gold Miners Index (XAU) has underperformed GLD since 5/31/1996, with no clear end in sight to that relatively Bearish trend.

Inflation expectations are in a rising trend. The ratio of the price of bond TIPS to 10-year U.S. Treasury Notes rose to another new nine-month high on 6/11/07. This ratio has been rising since 1/16/07, thereby indicating a trend toward rising inflation expectations.

Bond prices fell further. TLT hit another new eleven-month low, the lowest since July, 2006. Again and again, the main trend has been confirmed Bearish for iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT).

U.S. dollar consolidated recent gains. The two-month trend is up, but the long-term, six-year trend is down. The dollar has been falling since its peak at 121.29 on 7/5/2001.

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

1.68% Brazil
1.41% Oil Services
1.32% Utilities
1.14% Germany
0.98% Mexico
0.77% Energy
0.74% Dow Utilities
0.74% Singapore
0.72% Gold Mining
0.60% Natural Gas
0.55% Consumer Staples
0.52% Broker Dealers
0.46% AMEX Composite
0.46% Financial
0.40% Banks
0.37% Belgium
0.36% Insurance
0.36% Drugs
0.35% France
0.28% Health Care
0.28% Network
0.21% Oil
0.20% Technology
0.20% Taiwan
0.16% NYSE Composite
0.14% Biotechs
0.14% British Pound
0.13% Industrial
0.12% Health Care Products
0.10% S&P 500
0.09% S&P 100
0.09% Wilshire 5000
0.08% Russell 1000
0.08% Hospitals
0.08% US Dollar Index
0.06% S&P Mid Caps
0.05% Russell 3000
0.05% Austria
0.04% Chemicals
0.04% Australia
0.04% United Kingdom
0.04% Australian Dollar
0.03% Sweden
0.03% 30Y T-Bond
0.00% Dow Industrial
0.00% Value Line
0.00% Netherlands
-0.01% Dow Composite
-0.02% Health Care
-0.03% Canadian Dollar
-0.04% Euro Index
-0.05% Nasdaq Composite
-0.11% Disk Drives
-0.12% Japanese Yen
-0.14% S&P Small Caps
-0.14% Hardware
-0.14% Japan
-0.17% Malaysia
-0.17% Spain
-0.18% Hong Kong
-0.22% DOT
-0.23% Nasdaq 100
-0.25% Russell 2000
-0.25% Swiss Franc
-0.31% Commodity Related
-0.33% Consumer Discretionary
-0.33% Computer Tech
-0.41% Semiconductors
-0.44% Canada
-0.45% Internet
-0.53% Dow Transports
-0.62% Retailers
-0.78% Italy
-0.87% Materials
-0.92% Paper
-1.02% South Korea
-1.06% Switzerland
-1.19% Airlines
-1.52% REITs

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 on 6/5/07.

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.”