Daily Stock Market Commentary – 6/2/2008

On Friday, major stock price indexes opened moderately higher, turned choppy, and closed slightly lower than their opening prices. The S&P 500 closed at 1,400.38, up 2.12 or 0.15%. Total NYSE volume fell 1%. The volume of advancing stocks minus the volume of declining stocks was net +10% of the volume of changed stocks.

The stock index price action on Friday fit the definition of a Spinning Top, a one-day Japanese Candlestick that has shadows longer than its real body. Spinning Tops indicate indecision, a standoff of bullish and bearish forces. Friday also was an Inside Day, with a lower high and higher low compared to the previous trading day—again indicating directionless trading.

I have been assuming that the March-May rally was nothing more than a counter-trend rally and Secondary Reaction Continuation Pattern within the context of a Primary Bearish Trend. The sum total weight of the evidence for the stock market in general appeared to be taking on more of a neural bias this past week. A cautious approach still seems prudent.

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.

Primary Tide Trends for the 9 major sectors last for years. Here are my up-to-date Relative Strength Rankings, as measured with emphasis on these long-term Primary Tide Trends (listed in order of long-term relative strength):

Energy (XLE) Neutral, Market Weight. On 5/20/08, both the XLE price close and the XLE/SPY Relative Strength Ratio rose to new all-time highs, again confirming a major uptrend.

Materials (XLB) Neutral, Market Weight. On 5/20/08, XLB/SPY Relative Strength Ratio rose to another new all-time high. On 5/16/08, XLB price rose to another new all-time high. On 4/16/08, both the XLB price and the XLB/SPY Relative Strength Ratio rose to new all-time highs, confirming the major uptrend.

Technology (XLK) Neutral, Market Weight. On 5/30/08, the XLK/SPY Relative Strength Ratio rose to a new 5-month high, confirming an improving intermediate-term trend.

Utilities (XLU) Neutral, Market Weight. The XLU/SPY Relative Strength Ratio rose to a new 4-month high on 5/22/08. Since 10/17/02, the XLU/SPY Relative Strength Ratio has outperformed substantially. Since 5/15/08, the XLU/SPY Relative Strength Ratio has been rising again. So, Utilities have outperformed the S&P 500 both long term and short term.

Consumer Staples (XLP) Neutral, Market Weight. Since 3/28/08, the XLP/SPY Relative Strength Ratio has underperformed moderately.

Industrial (XLI) Neutral, Market Weight. Since 3/31/08, the XLI/SPY Relative Strength Ratio has underperformed moderately.

Health Care (XLV) Bearish, Underweight. Since 10/9/02, the XLV/SPY Relative Strength Ratio has underperformed substantially. On 5/15/08, the XLV/SPY Relative Strength Ratio fell to another new 6-year low, again confirming the existing Primary Bearish trend.

Consumer Discretionary (XLY) Bearish, Underweight. Since 1/5/05, the XLY/SPY Relative Strength Ratio has underperformed substantially. On 1/11/08, the XLY/SPY Relative Strength Ratio fell to a new 6-year low, confirming a major downtrend.

Financial (XLF) Bearish, Underweight. On 5/30/08, the XLF/SPY Relative Strength Ratio fell to its lowest level in more than 7 years. Since 3/23/04, the XLF/SPY Relative Strength Ratio has underperformed substantially. On 3/17/08, both absolute price and the XLF/SPY Relative Strength Ratio fell to their lowest levels in nearly 5-years, again confirming a major Bearish trend.

Foreign stock indexes Relative Strength Ratio rose to a new 5-month high on 5/23/08. EFA outperformed since 2/8/08 and, longer term, since the major bottom on 3/12/03. EFA is the ETF representing the EAFE, the international developed country stock markets, ex the U.S. and Canada.

NASDAQ Composite price outperformed since 3/3/08. Longer term, the relative trends in larger time frames are unclear, because the NASDAQ underperformed from 11/7/07 to 3/3/08, when the Relative Strength Ratio fell to a new 9-month low, thereby confirming downtrends in larger time frames.

Growth Stock/Value Stock Relative Strength Ratio rose to another new 3-year high on 5/30/08. Long term, the Growth/Value ratio (IWF/IWD) has been in an uptrend since 8/8/06.

The Small Cap/Large Cap Relative Strength Ratio outperformed since 3/10/08. Therefore, the intermediate-term trend has been confirmed as Bullish for Small Caps. But still, the Relative Strength Ratio is down since the peak on 4/19/06, so the long-term trend appears less clear.

Crude Oil July consolidated recent losses. On 5/28/08, I noted that Crude Oil has been quite overbought, so a consolidation or correction would come as no surprise. U.S. OIL FUND ETF (AMEX: USO) is not a pure play on Crude Oil, although it generally moves in the same direction.

The Energy stock sector has underperformed Crude Oil since 12/10/07.

Gold June futures contract consolidated recent losses. On 5/29/08, I noted that Gold broke down below the lows of the previous 8 trading days, and that Gold’s trend turned Bearish, for both short-term and intermediate-term time frames.

Silver is still lagging Gold. Silver sharply underperformed Gold since 3/5/08. In addition, iShares Silver Trust (AMEX: SLV) has been relatively weak compared to Gold longer term, since 12/7/06. Finally, for the past 28 years, since 1/2/80, Silver has underperformed Gold.

The Gold Miners ETF (GDX) / Gold Bullion Relative Strength Ratio underperformed Gold since 10/31/07. Longer-term, GDX significantly underperformed Gold since 10/31/07. Therefore, GDX trends are Bearish relative to Gold itself.

U.S. Treasury Bond futures prices consolidated recent losses. On 5/28/08, I noted that Bonds broke down below previous 7-month price lows. That marked a significant Bearish trend change for Bonds. So, I suggested that traders in all timeframes ought to consider selling bonds.

The U.S. dollar consolidated recent gains. On 5/29/08, the dollar broke out above the highs of the previous 7 trading days. The day-to-day trend appears to have improved for the very short-term, but the long-term Primary Tide trend is still Bearish.

The Art of Contrary Thinking: Traders need to be extremely nimble to keep up with rapid changes in the mass mood of late. The business and financial news has flipped from fear to hope and back again many times in recent months, creating an extremely choppy trading environment. Investors’ moods and stock volatility have jumped up and down abruptly with the latest “reports”. When mass psychology shifts so dramatically and unpredictably from hope to fear, without warning, risk control becomes more important than aggressive profit seeking. Stay flexible.

Sentiment/Contrary Opinion: There were 37.9% Bulls versus 32.2% Bears as of 5/28/08, according to the weekly Investors Intelligence survey of newsletter advisors. The Bull/Bear ratio fell to 1.18, down from 1.54 the previous week. The ratio’s 38-year range is 0.28 to 17.51, and the median is 1.47.

VIX “Fear Index” is now at 17.83 and falling, indicating decreasing Fear. VIX fell from a peak of 32.64 on 3/17/08 to a low of 16.30 on 5/15/08. The all-time high was 45.74 on 10/8/98. The all-time low was 9.89 on 1/24/07. VIX is a market estimate of expected constant 30-day volatility, calculated by weighting S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates.

VXN “Fear Index” is now at 20.85 and falling, indicating decreasing Fear. VXN fell from a peak of 35.63 on 1/22/08 to a low of 20.00 on 5/16/08. The all-time high was 114.23 on 10/8/98. The all-time low was 12.61 on 7/29/05. VXN measures NASDAQ Volatility using a method comparable to that used for VIX.

CBOE Put/Call Ratio is 0.59, which indicates normal sentiment. Its 4-year simple moving average and median are 0.62, and its 4-year range is 0.35 to 1.28.

ISEE Call/Put Ratio is 1.09, which indicates mildly Bearish sentiment. The ratio’s 4-year simple moving average is 1.50, 4-year median is 1.47, and 4-year range is 0.51 to 3.04.

Fundamentals: The 2003-2007 Bull Market was fed by abundant global liquidly, M&A, leveraged buyouts, corporate stock buybacks, and the net balance of positive earnings surprises. The unfolding fallout from the subprime credit market crisis has derailed that engine. Economic statistics and corporate earnings have weakened.

A Secondary Reaction was signaled on 4/18/28, when the Dow-Jones Industrials and Transports both closed at 3-month highs. But the Primary Tide Major Trend still may be Bearish. On 5/19/08, the Transports tested their all-time high and failed to make a new high. Meanwhile, the Industrials languished far below their highs. Following such failure to advance, a downside test should follow. The Dow Theory confirmed a Primary Bear Market on 11/21/07 when both the Dow-Jones Industrial Average and the Dow-Jones Transportation Average closed below their respective closing price lows of August, 2007.

To discover the next Resistance, traders probably will be watching how the market acts at the following levels for the Standard & Poor’s 500 cash index (1,400.38):

Potential Resistance
1,576.09, high of 10/11/2007
1,552.76, high of 10/31/2007
1,523.57, high of 12/11/2007
1,498.85, high of 12/26/2007
1,440.24, high of 5/19/08

To discover the next Support, traders probably will be watching how the market acts at the following levels for the S&P 500 cash index (1,400.38):

Potential Support
1,324.35, low of 4/15/2008
1,256.98, low of 3/17/2008
1,224.54, low of 7/18/2006
1,219.29, low of 6/14/2006
1,214.45, low of 11/4/2005
1,201.07, low of 11/2/2005
1,168.20, low of 10/13/2005
1,163.23, high of 3/5/2004
1,159.86, low of 5/17/2005
1,153.64, low of 5/16/2005
1,146.18, low of 5/13/2005
1,139.14, low of 4/29/2005
1,136.37, low of 4/20/2005

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

3.08% Metals & Mining SPDR, XME
2.27% Energy Exploration & Prod, PXE
1.84% Malaysia Index, EWM
1.70% Brazil Index, EWZ
1.69% Internet B2B H, BHH
1.67% Internet Infrastructure H, IIH
1.63% WilderHill Clean Energy PS, PBW
1.63% Ultra MidCap400 Double, MVV
1.62% China LargeCap Growth G D H USX PS, PGJ
1.58% Semiconductor SPDR, XSD
1.48% Water Resources, PHO
1.47% Semiconductor iS GS, IGW
1.35% Japan Index, EWJ
1.33% Japan LargeCap Blend TOPIX 150, ITF
1.33% Singapore Index, EWS
1.29% Oil & Gas, PXJ
1.28% South Korea Index, EWY
1.22% Netherlands Index, EWN
1.22% Basic Materials DJ US, IYM
1.18% Silver Trust iS, SLV
1.16% Asia 50 BLDRS, ADRA
1.15% Ultra QQQ Double, QLD
1.12% Aerospace & Defense, PPA
1.12% Italy Index, EWI
1.09% Networking, IGN
1.09% Gold Shares S.T., GLD
1.07% Natural Resource iS GS, IGE
1.05% Technology MS sT, MTK
1.04% Internet Architecture H, IAH
1.03% Energy SPDR, XLE
1.03% MidCap Growth iS M, JKH
1.01% Pacific VIPERs, VPL
0.98% Latin Am 40, ILF
0.97% MidCap S&P 400 SPDRs, MDY
0.96% Technology DJ US, IYW
0.95% Canada Index, EWC
0.94% Global Titans, DGT
0.91% Materials VIPERs, VAW
0.90% Australia Index, EWA
0.87% Growth MidCap Russell, IWP
0.87% Growth MidCap 400 B, IJK
0.81% France Index, EWQ
0.80% Semiconductors, PSI
0.78% Oil, Crude, U.S. Oil Fund, USO
0.78% MidCap S&P 400 iS, IJH
0.77% EMU Europe Index, EZU
0.75% Oil Services H, OIH
0.72% Industrials VIPERs, VIS
0.71% Emerging 50 BLDRS, ADRE
0.70% Energy VIPERs, VDE
0.68% Nanotech Lux, PXN
0.68% Extended Mkt VIPERs, VXF
0.68% Growth Large Cap, ELG
0.68% IPOs, First Tr IPOX-100, FPX
0.67% Commodity Tracking, DBC
0.67% Pharmaceutical H, PPH
0.67% Industrial LargeCap Blend DJ US, IYJ
0.66% Bond, 20+ Years Treasury, TLT
0.65% Growth SmallCap VIPERs, VBK
0.64% Growth LargeCap NASDAQ 100, QQQQ
0.64% Mexico Index, EWW
0.64% Consumer Staples SPDR, XLP
0.63% Growth SmallCap R 2000, IWO
0.63% Developed 100 BLDRS, ADRD
0.63% MidCap Russell, IWR
0.62% Hong Kong Index, EWH
0.62% Industrial SPDR, XLI
0.61% Value EAFE MSCI, EFV
0.60% Technology SPDR, XLK
0.59% Hardware & Electronics, PHW
0.59% Growth Mid Cap Dynamic PS, PWJ
0.58% Technology Global, IXN
0.57% Germany Index, EWG
0.57% Micro Cap Zachs, PZI
0.56% EAFE Index, EFA
0.56% MidCap Blend Core iS M, JKG
0.54% Growth VIPERs, VUG
0.52% Technology GS, IGM
0.52% MidCap VIPERs, VO
0.51% SmallCap S&P 600, IJR
0.50% Energy DJ, IYE
0.49% Growth SmallCap iS M, JKK
0.49% Info Tech VIPERs, VGT
0.47% Growth MidCap S&P 400, RFG
0.46% LargeCap Blend NYSE Composite iS, NYC
0.45% Transportation Av DJ, IYT
0.45% Spain Index, EWP
0.45% Growth Small Cap DJ, DSG
0.44% Lg Cap Growth PSD, PWB
0.44% Growth BARRA Small Cap 600, IJT
0.44% Growth LargeCap NASDAQ Fidelity, ONEQ
0.42% Growth S&P 500, RPG
0.42% Dividend Growth PS, PHJ
0.40% Dividend International, PID
0.40% Bond, Corp, LQD
0.39% Bond, TIPS, TIP
0.39% Switzerland Index, EWL
0.38% Telecommunications Global, IXP
0.38% Belgium Index, EWK
0.38% Growth EAFE MSCI, EFG
0.37% Software, IGV
0.37% Energy Global, IXC
0.36% Food & Beverage, PBJ
0.36% Bond, Aggregate, AGG
0.36% Telecommunications & Wireless, PTE
0.35% Growth LargeCap Russell 3000, IWZ
0.35% Healthcare Global, IXJ
0.35% Networking, PXQ
0.35% SmallCap Russell 2000, IWM
0.34% Emerging Markets, EEM
0.34% Pharmaceuticals, PJP
0.34% OTC Dynamic PS, PWO
0.34% Healthcare DJ, IYH
0.33% Value MidCap Russell, IWS
0.33% Bond, 10 Year Treasury, IEF
0.32% Short 200% Dow 30 PS, DXD
0.32% Growth 1000 Russell, IWF
0.31% Growth SmallCap Dynamic PS, PWT
0.28% Growth S&P 500/BARRA, IVW
0.27% Growth LargeCap iS M, JKE
0.26% SmallCap Core iS M, JKJ
0.25% S&P 500 SPDRs LargeCap Blend, SPY
0.25% Pacific ex-Japan, EPP
0.24% Euro STOXX 50, FEZ
0.23% Value Line Timeliness MidCap Gr, PIV
0.23% Small Cap VIPERs, VB
0.22% Microcap Russell, IWC
0.22% LargeCap Blend S&P=Weight R, RSP
0.21% Value SmallCap VIPERS, VBR
0.21% Ultra Dow30 Double, DDM
0.21% Value MidCap S&P 400 B, IJJ
0.20% Europe 350 S&P Index, IEV
0.19% LargeCap Blend Core iS M, JKD
0.19% Blend Total Market VIPERs, VTI
0.19% LargeCap Blend Total Market DJ, IYY
0.18% Biotechnology, IBB
0.18% Ultra S&P500 Double, SSO
0.16% LargeCap VIPERs, VV
0.16% LargeCap Blend Dynamic PS, PWC
0.16% Telecom Services VIPERs, VOX
0.16% Wilshire 5000 ST TM, TMW
0.15% Utilities, PUI
0.15% LargeCap Rydex Rus Top 50, XLG
0.14% Bond, 1-3 Year Treasury, SHY
0.14% Software H, SWH
0.13% Consumer Non-Cyclical, IYK
0.13% European VIPERs, VGK
0.12% LargeCap Blend Socially Responsible iS, KLD
0.11% Materials SPDR, XLB
0.11% Europe 100 BLDRS, ADRU
0.10% China 25 iS, FXI
0.09% LargeCap 1000 R, IWB
0.09% Health Care VIPERs, VHT
0.08% LargeCap Blend S&P 1500 iS, ISI
0.08% S&P 500 iS LargeCap Blend, IVV
0.07% Telecom DJ US, IYZ
0.07% Global 100, IOO
0.06% LargeCap Blend Russell 3000, IWV
0.06% Financials Global LargeCap Value, IXG
0.03% Software, PSJ
0.01% Utilities DJ, IDU
0.01% Short 100% S&P 500, SH
0.00% Short 100% Dow 30, DOG
0.00% Value 40 Large Low P/E FT DB, FDV
0.00% Value MidCap Dynamic PS, PWP
-0.01% Value SmallCap S&P 600 B, IJS
-0.05% Austria Index, EWO
-0.05% Building & Construction, PKB
-0.06% Semiconductor H, SMH
-0.08% DIAMONDS (DJIA), DIA
-0.09% Consumer Staples VIPERs, VDC
-0.11% Dividend Achievers PS, PFM
-0.12% Value 1000 Russell, IWD
-0.12% Value LargeCap Euro STOXX 50 DJ, FEU
-0.12% SmallCap PS Zacks, PZJ
-0.12% LargeCap Blend S&P 100, OEF
-0.13% Value MidCap iS M, JKI
-0.14% Value LargeCap NYSE 100 iS, NY
-0.14% Utilities VIPERs, VPU
-0.14% Value LargeCap Russell 3000, IWW
-0.14% Value SmallCap Russell 2000, IWN
-0.16% Health Care SPDR, XLV
-0.16% Value LargeCap Fundamental RAFI 1000, PRF
-0.16% Emerging VIPERs, VWO
-0.16% Dividend Appreciation Vipers, VIG
-0.21% Value Large Cap DJ, ELV
-0.21% Value Small Cap DJ, DSV
-0.22% United Kingdom Index, EWU
-0.22% Biotech H, BBH
-0.22% South Africa Index, EZA
-0.24% Biotech SPDR, XBI
-0.24% Internet H, HHH
-0.26% Value S&P 500 B, IVE
-0.28% Biotech & Genome, PBE
-0.28% Value MidCap S&P 400, RFV
-0.28% Broadband H, BDH
-0.28% Value SmallCap S&P 600, RZV
-0.29% Telecom H, TTH
-0.30% Utilities H, UTH
-0.30% Value VIPERs, VTV
-0.31% Taiwan Index, EWT
-0.33% Leisure & Entertainment, PEJ
-0.34% Sweden Index, EWD
-0.36% Value LargeCap Dynamic PS, PWV
-0.37% Short 200% S&P 500 PS, SDS
-0.40% Real Estate US DJ, IYR
-0.44% Retail, PMR
-0.46% Consumer D. VIPERs, VCR
-0.47% REIT VIPERs, VNQ
-0.47% Dividend SPDR, SDY
-0.49% Dividend High Yield Equity PS, PEY
-0.50% Retail H, RTH
-0.51% Dividend Leaders, FDL
-0.52% Value LargeCap iS M, JKF
-0.54% Value SmallCap iS M, JKL
-0.55% Consumer Cyclical DJ, IYC
-0.56% Capital Markets KWB ST, KCE
-0.58% REIT Wilshire, RWR
-0.59% Insurance, PIC
-0.64% Realty Cohen & Steers, ICF
-0.67% Utilities SPDR, XLU
-0.71% Financial DJ US, IYF
-0.77% Consumer Discretionary SPDR, XLY
-0.77% Value S&P 500, RPV
-0.80% Short 100% MidCap 400, MYY
-0.82% Financials VIPERs, VFH
-0.87% Short 200% QQQ PS, QID
-0.91% Short 100% QQQ, PSQ
-0.92% Value SmallCap Dynamic PS, PWY
-0.99% Dividend DJ Select, DVY
-0.99% Homebuilders SPDR, XHB
-1.03% Financial Services DJ, IYG
-1.05% Bank Regional H, RKH
-1.28% Financial SPDR, XLF
-1.43% Short 200% MidCap 400 PS, MZZ