By Robert W. Colby, Senior Analyst TraderPlanet.com
The Trouble with Subprime Mortgages
Financial sector made a new 5-year low relative to the S&P 500
Crude Oil rose to a 10-month high.
Materials sector Bullish: both price and relative strength made new highs.
Health Care sector Bearish: relative strength made a new 14-month low.
Stock prices opened lower and worked still lower into a 12:20 p.m. low. Prices stabilized, then recovered most of their loss in the final 75 minutes. Trading volume rose substantially on the NYSE, with 61% of the volume in declining stocks, suggesting dominating selling pressure. The Advance-Decline balances were Bearish on the NYSE and on the NASDAQ. Reactions to bad news are normal, of course, but the late recovery suggests that the stock market still has some resilience.
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.
Bullish Stocks: Rising Price and Rising Volume
% Price Change, Symbol, Name
9.82% , HUM , HUMANA
5.52% , STJ , ST JUDE MEDICAL
4.57% , SVU , SUPERVALU
4.76% , AMCC , APPLD MICRO CIRC
4.57% , DVN , DEVON ENERGY
3.56% , NEM , NEWMONT MINING
5.21% , CSX , CSX
2.34% , SLV , Silver Trust iS, SLV
2.70% , NSC , NORFOLK SOUTHERN
1.70% , BNI , BURLINGTON NORTH
2.45% , SBUX , STARBUCKS
1.27% , EWC , Canada Index, EWC
1.36% , IAU , Gold COMEX iS, IAU
2.65% , SWY , SAFEWAY
2.98% , CMCSA , COMCAST HOLDINGS STK A
1.32% , GLD , Gold Shares S.T., GLD
3.20% , PCAR , PACCAR
2.12% , AET , AETNA
3.36% , EOG , EOG RESOURCES
1.56% , XMSR , XM Satellite R
2.59% , AEE , AMEREN
1.86% , WMB , WILLIAMS
0.17% , EWI , Italy Index, EWI
1.62% , UNP , UNION PACIFIC
2.17% , CPB , CAMPBELL SOUP
1.37% , WLP , WELLPOINT HEALTH
1.78% , VDE , Energy VIPERs, VDE
2.26% , XLE , Energy SPDR, XLE
2.21% , SIRI , Sirius Satellite
1.87% , IYE , Energy DJ, IYE
2.78% , BJS , BJ SERVICES
0.59% , IYT , Transportation Av DJ, IYT
0.73% , XEL , XCEL ENERGY
1.80% , AGN , ALLERGAN
2.64% , XTO , XTO ENERGY INC
0.29% , SH , Short 100% S&P 500, SH
0.59% , TXT , TEXTRON
2.31% , XOM , EXXON MOBIL
2.24% , MHS , MEDCO HEALTH
1.09% , UNH , UNITEDHEALTH GRP
0.68% , VPU , Utilities VIPERs, VPU
1.16% , PCG , PG&E
0.38% , TLT , Bond, 20+ Years Treasury, TLT
1.99% , PTEN , Patterson-UTI Energy Inc
0.74% , YUM , YUM BRANDS
1.70% , WFMI , Whole Foods Market Inc
0.35% , PSQ , Short 100% QQQ, PSQ
0.79% , ESRX , EXPRESS SCRIPTS
0.15% , XBI , Biotech SPDR, XBI
1.84% , IP , INTL PAPER
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-11.29% , CIT , CIT GROUP
-0.82% , DSG , Growth Small Cap DJ, DSG
-1.71% , IYG , Financial Services DJ, IYG
-2.36% , XSD , Semiconductor SPDR, XSD
-1.05% , EKH , Europe 2001 H, EKH
-1.86% , KCE , Capital Markets KWB ST, KCE
-0.61% , MKH , Market 2000 H, MKH
-3.20% , PFE , PFIZER
-3.95% , CMA , COMERICA
-0.45% , PZJ , SmallCap PS Zacks, PZJ
-2.07% , ABC , AMERISOURCEBERGN
-2.32% , CC , CIRCUIT CITY STR
-3.50% , DLX , DELUXE
-1.77% , FHN , FIRST TENNESSEE
-2.01% , MCO , MOODYS CORP
-2.29% , PHM , PULTE HOMES
-0.81% , ACS , AFFILIATED COMPUTER
-2.75% , MS , MORGAN STANLEY
-1.93% , LEH , LEHMAN BROS HLDG
-0.68% , EWU , United Kingdom Index, EWU
-1.00% , EWL , Switzerland Index, EWL
-0.34% , TMW , Wilshire 5000 ST TM, TMW
-2.48% , GCI , GANNETT
-2.01% , GS , GOLDMAN SACHS
-2.35% , MI , MARSHAL & ILSLEY
-1.45% , MIL , MILLIPORE
-1.59% , BC , BRUNSWICK
-2.57% , MCK , MCKESSON CORP
-0.93% , RZG , Growth SmallCap S&P 600, RZG
-0.50% , CCU , CLEAR CHANNEL
-1.95% , ABK , AMBAC FINL GRP
-2.08% , JPM , J P MORGAN CHASE
-1.98% , PGJ , China LargeCap Growth G D H USX PS, PGJ
-2.12% , BMC , BMC SOFTWARE
-0.73% , UNM , UNUMPROVIDENT
-1.77% , WM , WASHINGTON MUT
-1.24% , EZU , EMU Europe Index, EZU
-1.51% , LM , LEGG MASON
-1.41% , EWT , Taiwan Index, EWT
-0.82% , PSJ , Software, PSJ
-1.65% , LNC , LINCOLN NATL
-1.69% , BSX , BOSTON SCIENT
-1.09% , MCHP , Microchip Technology Incorporated
-3.69% , JCI , JOHNSON CONTROLS
-0.80% , MNST , MONSTER WORLDWID
-1.37% , FII , FED INVESTORS STK B
-1.91% , RX , IMS HEALTH
-1.12% , ADSK , AUTODESK
-0.71% , MTK , Technology MS sT, MTK
-1.78% , STI , SUNTRUST BANKS
Sectors: among the 9 major U.S. sectors, 6 rose and 3 fell.
Major Sectors Ranked for the Day
% Price Change, Sector
2.26% Energy
0.75% Utilities
0.16% Materials
0.04% Consumer Staples
-0.13% Consumer Discretionary
-0.22% Industrial
-0.28% Health Care
-0.52% Technology
-1.28% Financial
Energy (XLE) Bullish. Both price and relative strength made new highs on 7/13/07. Relative strength has been strong compared to the S&P since 3/12/03. Overweight.
Materials (XLB) Bullish. Both the closing price and relative strength made new highs on 7/18/07. XLB has been relatively strong compared to the S&P since 9/27/00. Overweight.
Industrial (XLI) Bullish. Price and relative strength made new highs on 7/17/07. XLI has been relatively strong compared to the S&P since 8/9/06. Overweight.
Technology (XLK) Bullish. Price made a new 6-year high close and relative strength made a new 19-month high on 7/17/07. XLK has been relatively Bullish compared to the S&P since its low on 7/24/06.
Financial (XLF) Bearish. XLF made a new 5-year low relative to the S&P 500 on 7/18/07. Underweight.
Consumer Staples (XLP) Bearish. Relative strength made a new 7-year low on 6/19/07. XLP has been relatively weak compared to the S&P since 10/9/02. Underweight.
Utilities (XLU) Bearish. XLU has been relatively weak compared to the S&P since 9/20/01. Underweight.
Health Care (XLV) Bearish. XLV made a new 14-month relative strength low on 7/18/07 and has been relatively weak compared to the S&P since 10/9/02. Underweight.
Consumer Discretionary (XLY) Bearish. XLY made a new 9-month relative strength low on 7/16/07 and has been relatively weak compared to the S&P since 1/5/05. Underweight.
Foreign stocks absorbed orderly profit taking over the past four days. EFA made a new absolute price high on 7/12/07 and outperformed strongly since 6/13/07. The EFA’s short-term relative strength 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 has outperformed since 5/17/07. But the NASDAQ Composite has been relatively weak compared to the S&P since 3/10/00.
Growth beat Value since 5/16/07. But longer term, the major trend of Growth/Value has been mostly Bearish for seven years.
Large Caps beat Small Caps since 6/27/07. Longer term, Large Caps beat Small Caps since the Small-Cap relative strength peak on 4/19/06.
Crude Oil rose to a 10-month high. Volume rose, confirming the short-term trend reversal. Longer term, the U.S. OIL FUND ETF (AMEX: USO) appears to be in an uptrend since its shakeout low at 42.56 on 1/18/07.
Energy stocks outperformed both the USO and the SPY. Long term, since 3/12/03, the stocks in the Energy Select Sector SPDR ETF (XLE) have significantly outperformed crude oil as a commodity as well as the S&P 500. So, the Relative Strength major trend is Bullish for the energy stocks.
Gold made a new 6-week price high and outperformed the SPY. Longer term, 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 GLD has been relatively weak for 13 months.
Silver up since new 6-month price low on 6/26/07 but still underperformed GLD since 12/7/06. iShares Silver Trust (AMEX: SLV) broke down to a new 6-month low on 6/26/07. The main trend is questionable.
The Gold Miners Index (XAU) has outperformed GLD since 6/26/07. On the other hand, XAU has underperformed GLD since 5/31/1996, so the long-term trend is questionable.
Inflation expectations eased moderately lower since 6/22/07. Still, for the longer term, the ratio of the price of bond TIPS to 10-year U.S. Treasury Notes has been rising since 1/16/07, indicating rising inflation expectations.
Bond prices appear to be consolidating within their Bearish major trends. TLT hit a new 3-year price low on 6/12/07, the lowest since June, 2004. That indicated a very serious major 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 hit new low. The dollar has been heading nearly straight down since 6/13/07. Longer term, the dollar has been falling most of the time since its peak at 121.29 on 7/5/2001 and remains very Bearish.
Japanese Yen appears to be consolidating within its Bearish major trend. On 6/15/07, the Yen fell to its lowest level in more than four years. The Yen has been weak since its peak at 12,625 on 4/19/1995.
2.26% Energy
2.12% Natural Gas
1.89% Oil Services
1.55% Commodity Related
1.42% Oil
1.42% Paper
1.27% Canada
0.87% Dow Utilities
0.75% Utilities
0.67% 30Y T-Bond
0.59% Dow Transports
0.49% Australian Dollar
0.48% Japanese Yen
0.42% British Pound
0.41% Airlines
0.31% Disk Drives
0.29% Swiss Franc
0.18% Dow Composite
0.17% Italy
0.17% Euro Index
0.16% Materials
0.13% Chemicals
0.13% Spain
0.11% AMEX Composite
0.04% Consumer Staples
-0.02% Insurance
-0.04% Biotechs
-0.04% Hardware
-0.04% Netherlands
-0.04% Canadian Dollar
-0.06% Brazil
-0.06% Hong Kong
-0.10% Health Care Products
-0.10% Australia
-0.10% Belgium
-0.13% Consumer Discretionary
-0.13% Retailers
-0.13% Sweden
-0.13% US Dollar Index
-0.19% Nasdaq 100
-0.20% Russell 1000
-0.21% S&P 500
-0.22% NYSE Composite
-0.22% Russell 3000
-0.22% Wilshire 5000
-0.22% Industrial
-0.27% S&P Mid Caps
-0.27% Value Line
-0.28% Health Care
-0.32% S&P 100
-0.36% S&P Small Caps
-0.36% Health Care
-0.38% Dow Industrial
-0.39% REITs
-0.47% Nasdaq Composite
-0.47% Russell 2000
-0.48% Japan
-0.52% Technology
-0.54% Austria
-0.56% Network
-0.68% United Kingdom
-0.69% Hospitals
-0.75% DOT
-0.76% Computer Tech
-0.87% Internet
-0.94% Drugs
-1.00% Switzerland
-1.01% France
-1.01% Mexico
-1.17% Malaysia
-1.26% Germany
-1.28% Financial
-1.32% Banks
-1.34% Semiconductors
-1.40% South Korea
-1.41% Taiwan
-1.68% Broker Dealers
-1.84% Singapore
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.
