Daily Stock Market Commentary – 6/22/2007

Stocks recovered a normal fraction of Wednesday’s relatively large loss.

Trading volume remained at high levels, on both on the NYSE and NASDAQ, indicating a return of active buying.

The Advance-Decline balance was moderately Bullish on the NYSE but lagged on NASDAQ, as usual.

The Standard & Poor’s 500 cash index (SPX: 1,522.19) had a sharp three-day bounce last week, This week, however, it stalled out just short of resistance near old highs: 1,540.56, which is the intraday high of 6/1/2007, and 1,553.11, the intraday high of 3/24/2000.

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.

Energy (XLE) outperformed, and XLE’s major trend is Bullish. XLE has been relatively strong compared to the S&P since 3/12/03. Overweight.

Materials (XLB) performed about inline with the broad indices, and XLB’s major trend is Bullish. XLB has been relatively strong compared to the S&P since 9/27/00. Overweight for the long term.

Industrial (XLI) underperformed moderately, but XLI’s major trend is Bullish. XLI has been relatively strong compared to the S&P since 8/9/06. Overweight.

Technology (XLK) performed about inline with the broad indices, and XLK’s relative strength trend is Bullish since its low on 7/24/06. In the big picture, however, XLK has been relatively weak compared to the S&P since 3/10/00.

Financial (XLF) underperformed again, and XLF’s major trend is Bearish. XLF has been relatively weak compared to the S&P since 3/23/04. Underweight.

Consumer Staples (XLP) underperformed again, and XLP’s major trend is Bearish. XLP has been relatively weak compared to the S&P since 10/9/02. Underweight.

Utilities (XLU) outperformed, but XLU’s major trend is Bearish. XLU has been relatively weak compared to the S&P since 9/20/01. Underweight.

Health Care (XLV) underperformed again, and XLV’s major trend is Bearish. XLV has been relatively weak compared to the S&P since 10/9/02. Underweight.

Consumer Discretionary (XLY) underperformed again, and XLY’s major trend is Bearish. XLY has been relatively weak compared to the S&P since 1/5/05. Underweight.

Foreign Stocks sharply outperformed, with Relative Strength making another new six-week high. EFA has outperformed strongly since 6/13/07, and its short-term trend is still Bullish. Long term, EFA (the EAFE, international developed country stock markets, ex the U.S. and Canada) outperformed the S&P 500 since 3/19/03.

NASDAQ outperformed slightly for the day, but NASDAQ’s relative strength trends are mixed. The NASDAQ Composite has been relatively strong since 5/17/07 but relatively weak compared to the S&P since 3/10/00.

Growth stocks rose, but still underperformed Value. Longer term, the major trend of Growth/Value has been mostly Bearish for seven years.

Small Caps outperformed relative to Large Caps. Longer term, the trend has been more Bearish than Bullish since the Small-Cap relative strength peak on 4/19/06.

Semiconductors rose on the back of an analyst’s upgrade of AMD. Basically, he seemed to say, things are very bad, of course, but just maybe not quite as bad as the consensus now figures. Who to believe? Technically, SMH has been underperforming the S&P 500 for more than seven years, since 3/10/00, and I choose to believe that major trend.

Crude Oil rose—but on lower, below-average volume. On 6/19/07, intraday, crude made a new ten-week high—but on below-average volume. Volume is not confirming price strength. From a longer perspective, 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. Watch the April high at 54.22 for resistance. 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 rose more than USO. And generally, 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 price broke down below previous four-day lows. Trading volume remained low, suggesting little interest in trading gold. On 6/8/07, GLD price 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, topped out at 70.2 on 5/12/06, and so has been relatively weak for 13 months.

Silver underperformed Gold for the past two weeks and has been mostly underperforming since 12/7/06. On an absolute price basis, the larger trend for iShares Silver Trust (AMEX: SLV) looks like a trading range since the top on 5/11/06.

The Gold Miners Index (XAU) outperformed GLD. XAU underperformed GLD since 5/31/1996, however, so the big trend is Bearish.

Inflation expectations turned up, signaling a renewed uptrend. The ratio of the price of bond TIPS to 10-year U.S. Treasury Notes set a new nine-month high on 6/14/07, after rising for six months, since 1/16/07. This intermediate-term trend still points toward rising inflation expectations.

Bond prices fell again and remain Bearish. TLT hit a new three-year price low on 6/12/07, the lowest since June, 2004. That indicates a very serious price downtrend and yield uptrend. The main trend is clearly Bearish for iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT).

U.S. dollar reversed to the upside after four consecutive losses. The dollar has been heading down since 6/13/07. It has been mostly heading up since 5/1/07. Longer term, the dollar has been falling most of the time since its peak at 121.29 on 7/5/2001. I guess you could say the dollars has had its ups and downs. So, what is the trend? In cases of such time-frame conflict, the longer-term trend usually wins.

Japanese Yen eased slightly lower again. On 6/15/07, it fell to its lowest level in more than four years, confirming a Bearish trend. The yen has been weak since its peak at 12,625 on 4/19/1995.

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

3.44% Taiwan
3.00% Semiconductors
2.50% Oil Services
2.10% Singapore
2.00% Energy
1.92% Oil
1.84% Natural Gas
1.75% Brazil
1.66% Disk Drives
1.60% South Korea
1.58% Commodity Related
1.46% Network
1.42% Hong Kong
1.35% Hardware
1.29% Netherlands
1.12% Computer Tech
1.12% Paper
1.07% Hospitals
1.02% Gold Mining
1.00% Nasdaq 100
0.94% Belgium
0.91% United Kingdom
0.90% Chemicals
0.89% Dow Transports
0.87% Internet
0.87% Spain
0.79% Dow Utilities
0.75% Mexico
0.73% DOT
0.73% France
0.71% Italy
0.70% S&P Mid Caps
0.67% Germany
0.65% Nasdaq Composite
0.64% Dow Composite
0.64% Utilities
0.62% S&P 500
0.60% Russell 1000
0.60% Austria
0.58% Russell 3000
0.57% S&P 100
0.56% NYSE Composite
0.56% Wilshire 5000
0.56% Materials
0.53% Value Line
0.51% Technology
0.48% Japan
0.47% Sweden
0.43% Russell 2000
0.42% Dow Industrial
0.31% S&P Small Caps
0.30% Airlines
0.30% Health Care Products
0.30% Retailers
0.29% Consumer Staples
0.28% Health Care
0.25% Health Care
0.24% Australia
0.23% Canada
0.20% Industrial
0.20% Australian Dollar
0.19% Drugs
0.17% Malaysia
0.16% Financial
0.16% Broker Dealers
0.15% US Dollar Index
0.08% Banks
-0.04% Switzerland
-0.07% Japanese Yen
-0.11% AMEX Composite
-0.11% British Pound
-0.15% REITs
-0.16% Insurance
-0.17% Biotechs
-0.18% Consumer Discretionary
-0.22% Euro Index
-0.41% Swiss Franc
-0.47% 30Y T-Bond
-0.91% Canadian Dollar

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

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.” The cyclical nature of stock prices never really changes, although the turning points are not always easy to predict.