Daily Stock Market Commentary – 6/13/2007

Inflation expectations are in a rising trend.
Stocks falling on heavier volume means that the Bears are in control—for the moment.
Short-term stock market momentum oscillators suggest “oversold”, but that is no guarantee of a bounce.

Stocks closed lower in more active trading, falling sharply in the final two hours after another rally attempt fizzled.

Trading volume rose substantially, on both on the NYSE and NASDAQ, suggesting much more power behind the selling than behind the previous buying. The Bears are running the show.

The Advance-Decline balance was very Bearish. The NYSE Cumulative Daily Advance-Decline Line fell to its lowest level in two months. The Cumulative Daily Advance-Decline Line on the NASDAQ fell to its lowest level in three months.

Short-term momentum oscillators turned down but did not make new lows. These oscillators appear to be at a critical juncture.

Crashing Bonds and soaring yields are taking a toll on investor psychology. There was talk that rising interest rates could dampen M&A activity.

Spotlight on event stocks: 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, all nine fell.

Energy (XLE) turned down but its major trend looks Bullish. XLE has been relatively strong compared to the S&P since 3/12/03. Overweight.

Materials (XLB) are underperforming since 6/1/07. 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) underperformed. But the major trend looks Bullish, since XLI has been relatively strong compared to the S&P since 8/9/06. Overweight.

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

Technology (XLK) underperformed, but only 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) outperformed. But XLP has been relatively weak compared to the S&P since 10/9/02. Underweight.

Utilities (XLU) underperformed again. XLU has been relatively weak compared to the S&P since 9/20/01. Underweight.

Health Care (XLV) outperformed, but not enough to disturb its persistent downtrend. XLV has been relatively weak compared to the S&P since 10/9/02. Underweight.

Consumer Discretionary (XLY)) outperformed, but not enough to disturb its persistent downtrend. XLY has been relatively weak compared to the S&P since 1/5/05. Underweight.

Foreign Stocks fell to a new two-month low. Several foreign stock markets were among the biggest losers on the day, falling 1% to 4%. The ratio of the EAFE (international developed country stock markets, ex the U.S. and Canada) relative to the S&P 500 has been falling since 4/12/07, meaning that the EAFE has underperformed the S&P 500. This decline is beginning to look like a more serious correction.

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 turned down. The trend of the ratio of Growth stocks relative to Value stocks has been choppy and sideways this year, 2007. The major trend of Growth/Value has been mostly Bearish for seven years.

Small Caps have Bearish minor and major relative strength trends. The ratio of Small Cap stocks relative to Large Caps (Russell 2000/Russell 1000) has been falling 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 continued to fall. 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 turned down on lower volume. 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 turned down. 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 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.

Bearish Bonds Break Badly. TLT hit a new three-year price low, the lowest since June, 2004. 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 rose to a new two-month high, confirming its short-term uptrend. The two-month trend is rising. The long-term, six-year trend is still 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:

0.48% British Pound
0.25% US Dollar Index
0.10% Japanese Yen
0.07% Australian Dollar
-0.19% Euro Index
-0.20% Canadian Dollar
-0.25% Swiss Franc
-0.27% Canada
-0.59% Nasdaq 100
-0.61% Insurance
-0.73% Hospitals
-0.81% Consumer Discretionary
-0.81% Health Care Products
-0.84% Health Care
-0.85% Malaysia
-0.86% South Korea
-0.87% Nasdaq Composite
-0.87% Commodity Related
-0.87% Natural Gas
-0.88% Computer Tech
-0.88% United Kingdom
-0.94% Consumer Staples
-0.94% Semiconductors
-0.94% Taiwan
-0.97% Dow Industrial
-0.97% AMEX Composite
-0.97% Health Care
-0.97% Biotechs
-0.97% 30Y T-Bond
-1.00% Drugs
-1.03% Internet
-1.04% Chemicals
-1.05% Russell 1000
-1.05% Wilshire 5000
-1.05% DOT
-1.05% Retailers
-1.07% S&P 500
-1.07% Hardware
-1.08% Russell 3000
-1.09% S&P 100
-1.11% S&P Mid Caps
-1.14% Network
-1.17% Value Line
-1.17% Gold Mining
-1.17% Oil
-1.18% Technology
-1.19% NYSE Composite
-1.19% S&P Small Caps
-1.22% Materials
-1.23% Energy
-1.29% Industrial
-1.30% Japan
-1.34% Banks
-1.35% Dow Composite
-1.36% Financial
-1.38% Dow Utilities
-1.38% Russell 2000
-1.39% Austria
-1.41% Disk Drives
-1.43% Italy
-1.44% Germany
-1.47% Singapore
-1.50% Belgium
-1.52% Brazil
-1.53% Switzerland
-1.55% Oil Services
-1.61% Netherlands
-1.63% Utilities
-1.69% Broker Dealers
-1.71% Paper
-1.73% REITs
-1.77% Australia
-1.85% Mexico
-1.91% Hong Kong
-1.92% Dow Transports
-2.02% France
-2.07% Airlines
-2.48% Spain
-3.64% Sweden

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.”