By Robert W. Colby, Senior Analyst

But safer to wait until downside momentum stalls out?

U.S. T. Bond prices made a new 9-week price high on a flight to safety.

Large Caps broke out to a new 21-month high relative to Small Caps.

Industrial and Technology stock sectors relative strength made another new high.

Financial stock sector made a new 10-month closing price low.

Consumer Discretionary stock sector made a new 4-month price low and a new 10-month relative strength low.

Both the S&P 500 and the popular S&P 500 ETF (SPY) broke down below their pivot lows of 7/11/07, thereby taking out stops below those lows on Thursday.

S&P 500 cash index (SPX: 1,482.66) touched an intraday low at 1,465.30, which is close to the Q1 2007 peak 1,461.57, set on 2/22/2007. Old highs often offer technical support.

From a longer-term perspective, the S&P is still higher than it has been anytime from year 2000 until 4/19/07. Its one-year uptrend line from the low of 7/17/16 is at 1443 and rising, so the one-year trend still points upward. VIX now at 20.74 indicates the greatest level of fear since the downside price shakeout in June 2006. Huge downside volume indicates panic, selling climax conditions. The SPX is now oversold according to many popular short-term oscillators. Still, it might be safer to wait until downside momentum stalls out before adding to long positions.

Trading volume jumped up to record levels, reflecting extreme selling of stocks. The Advance-Decline balances were extremely Bearish, both on the NYSE and the NASDAQ.

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

5.77% , CMI , CUMMINS
2.61% , SH , Short 100% S&P 500, SH
7.10% , DLX , DELUXE
2.43% , MYY , Short 100% MidCap 400, MYY
1.98% , DOG , Short 100% Dow 30, DOG
4.62% , SDS , Short 200% S&P 500 PS, SDS
3.67% , DXD , Short 200% Dow 30 PS, DXD
0.83% , TLT , Bond, 20+ Years Treasury, TLT
3.00% , UST , UST
1.20% , R , RYDER SYSTEM
2.15% , QID , Short 200% QQQ PS, QID
0.86% , PSQ , Short 100% QQQ, PSQ
4.19% , MZZ , Short 200% MidCap 400 PS, MZZ
0.47% , TIP , Bond, TIPS, TIP
0.24% , SHY , Bond, 1-3 Year Treasury, SHY
1.06% , BHH , Internet B2B H, BHH
1.51% , F , FORD MOTOR
0.56% , IFF , INTL FLAV & FRAG
0.50% , NVDA , NVIDIA
0.48% , MMM , 3M
0.14% , TRB , TRIBUNE
0.26% , PX , PRAXAIR
0.04% , ACV , Alberto-Culver Co.

Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name

-9.21% , SANM , SANMINA
-5.01% , EWO , Austria Index, EWO
-6.09% , IIH , Internet Infrastructure H, IIH
-2.08% , JKK , Growth SmallCap iS M, JKK
-3.73% , ADRA , Asia 50 BLDRS, ADRA
-3.08% , PMR , Retail, PMR
-3.13% , PUI , Utilities, PUI
-5.38% , EWA , Australia Index, EWA
-1.86% , RFG , Growth MidCap S&P 400, RFG
-7.49% , BDK , BLACK & DECKER
-3.00% , IYZ , Telecom DJ US, IYZ
-4.94% , ADRE , Emerging 50 BLDRS, ADRE
-4.10% , EWQ , France Index, EWQ
-2.14% , RPG , Growth S&P 500, RPG
-2.88% , JKL , Value SmallCap iS M, JKL
-3.97% , EWP , Spain Index, EWP
-2.97% , VCR , Consumer D. VIPERs, VCR
-3.15% , EKH , Europe 2001 H, EKH
-7.02% , FISV , FISERV
-4.15% , MVV , Ultra MidCap400 Double, MVV
-6.87% , DDS , DILLARD STK A
-7.11% , AA , ALCOA
-3.04% , PSJ , Software, PSJ
-7.19% , MU , MICRON TECH
-2.61% , RFV , Value MidCap S&P 400, RFV
-2.71% , PIV , Value Line Timeliness MidCap Gr, PIV
-4.98% , VIA , VIACOM INC. (New)
-2.38% , PWY , Value SmallCap Dynamic PS, PWY
-5.45% , CAR , Avis Budget Group, Inc. (CAR)
-5.51% , VWO , Emerging VIPERs, VWO
-2.27% , DSG , Growth Small Cap DJ, DSG
-1.92% , PWJ , Growth Mid Cap Dynamic PS, PWJ
-3.36% , EFG , Growth EAFE MSCI, EFG
-2.02% , PWO , OTC Dynamic PS, PWO
-3.18% , PWT , Growth SmallCap Dynamic PS, PWT
-4.15% , EWM , Malaysia Index, EWM
-5.15% , EWY , South Korea Index, EWY
-6.04% , EZA , South Africa Index, EZA
-2.68% , PPL , PPL
-3.13% , VGK , European VIPERs, VGK
-5.45% , VIA.B , VIACOM STK B

Sectors: among the 9 major U.S. sectors, all 9 fell.
Major Sectors Ranked for the Day
% Price Change, Sector

-1.47% Consumer Staples
-1.50% Technology
-2.05% Health Care
-2.09% Industrial
-2.27% Utilities
-2.36% Financial
-2.94% Consumer Discretionary
-3.33% Materials
-3.77% Energy

Looking beyond the daily fluctuation to the major trends (listed in order of relative strength):

Energy (XLE) Bullish. Price made a new high on 7/20/07 and relative strength made a new high on 7/23/07. XLE has been relatively strong compared to the S&P since 3/12/03. Overweight.

Materials (XLB) Bullish. Price made a new high on 7/19/07 and relative strength made a new high on 7/18/07. XLB has been relatively strong compared to the S&P since 9/27/00. Overweight.

Industrial (XLI) Bullish. Price made a new high on 7/19/07 and relative strength made a new high on 7/26/07. 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 on 7/19/07 and relative strength made a new 19-month high on 7/26/07. XLK has been relatively strong compared to the S&P since its low on 7/24/06.

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

Consumer Discretionary (XLY) Bearish. Price made a new 4-month low on 7/26/07. XLY made a new 10-month relative strength low on 7/26/07 and has been relatively weak compared to the S&P since 1/5/05. 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.

Health Care (XLV) Bearish. XLV made a new 5-year relative strength low on 7/19/07 and has been relatively weak compared to the S&P since 10/9/02. Underweight.

Financial (XLF) Bearish. XLF made a new 10-month closing price low on 7/26/07and a new 5-year relative strength low on 7/23/07. Underweight.

Foreign stocks fell sharply to a 3-month low. The long-term trend is still Bullish. EFA (the EAFE, international developed country stock markets, ex the U.S. and Canada) has outperformed the S&P 500 since 3/19/03.

NASDAQ outperformed since 5/17/07. Relative strength made a new 8-month high on 7/26/07.

Growth has been beating Value since 5/16/07. Longer term, the major trend of Growth/Value, mostly Bearish for seven years, could be turning.

Large Caps broke out to a new 21-month high relative to Small Caps. Large Caps beat Small Caps since 4/19/06, and that trend in is motion.

Crude Oil rose to a new 10-month high early but sharply reversed to the downside on higher volume. This might help build a “wall of worry”, or feelings of short-term uncertainty. Longer term, the U.S. OIL FUND ETF (AMEX: USO) remains in its uptrend since its shakeout low at 42.56 on 1/18/07.

Energy stocks fell steeply, underperforming both USO and S&P. 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 fell sharply. StreetTRACKS Gold Trust ETF (NYSE: GLD) has been in a choppy trading range since 5/12/06.

Silver underperformed Gold since 6/5/07. Longer term, iShares Silver Trust (AMEX: SLV) broke down to a new 6-month low on 6/26/07 and underperformed GLD since 12/7/06. So, the main trend is relatively Bearish.

The Gold Miners Index (XAU) underperformed Gold since 7/19/07. XAU also underperformed Gold since 1/31/06.

Deflating: inflation expectations moved sharply lower. The ratio of the price of bond TIPS to 10-year U.S. Treasury Notes has been falling since 6/22/07, indicating declining inflation expectations.

U.S. Treasury Bond prices made a new 9-week price high on 7/26/07 on a flight to safety. The short-term trend has been Bullish since the price low on 6/12/07. But since the peak at 97.66 on 6/16/03, the long-term trend appears Bearish for iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT).

U.S. dollar fell following Wednesday’s large gain. Longer term, dollar fell to a new 15-year price low on 7/24/07. The dollar has been falling most of the time since its peak at 121.29 on 7/5/01.

Japanese Yen broke out to a new 13-week price high on 7/26/07. But 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. So, the shorter-term trend is up and the long-term trend is down.

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

1.38% Japanese Yen
0.98% 30Y T-Bond
0.90% Swiss Franc
0.27% Euro Index
-0.03% British Pound
-0.24% US Dollar Index
-0.91% Australian Dollar
-1.00% Biotechs
-1.07% Hardware
-1.07% Canadian Dollar
-1.18% Computer Tech
-1.22% Nasdaq 100
-1.47% Consumer Staples
-1.50% Technology
-1.62% DOT
-1.74% Health Care Products
-1.77% Japan
-1.84% Nasdaq Composite
-1.87% Internet
-1.92% REITs
-1.95% Hospitals
-2.05% Health Care
-2.07% Health Care
-2.07% Insurance
-2.09% Industrial
-2.16% Network
-2.22% Semiconductors
-2.23% S&P Mid Caps
-2.26% Dow Industrial
-2.27% Utilities
-2.28% S&P 100
-2.31% Wilshire 5000
-2.33% S&P 500
-2.33% Russell 1000
-2.33% Disk Drives
-2.35% Russell 3000
-2.36% Financial
-2.37% Banks
-2.38% AMEX Composite
-2.40% Dow Transports
-2.43% Oil Services
-2.45% Dow Composite
-2.46% S&P Small Caps
-2.46% Natural Gas
-2.53% Drugs
-2.55% Value Line
-2.59% Russell 2000
-2.69% Retailers
-2.73% Belgium
-2.75% Chemicals
-2.78% NYSE Composite
-2.85% Switzerland
-2.94% Consumer Discretionary
-2.99% Dow Utilities
-3.00% Italy
-3.05% Canada
-3.11% Paper
-3.30% Commodity Related
-3.33% Materials
-3.40% Broker Dealers
-3.47% Hong Kong
-3.48% Netherlands
-3.54% Oil
-3.65% Germany
-3.77% Energy
-3.92% United Kingdom
-3.96% Gold Mining
-3.97% Spain
-4.10% France
-4.15% Malaysia
-4.37% Taiwan
-4.38% Mexico
-4.50% Airlines
-4.54% Sweden
-4.61% Singapore
-5.01% Austria
-5.15% South Korea
-5.38% Australia
-6.31% Brazil

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.

Investors might perceive anything that threatens to end abundant global liquidly, M&A, leveraged buyouts, corporate stock buybacks, and the net balance of positive earnings surprises as threats to the popular Bullish scenario.

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 (and indeed they have) 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.