By Robert W. Colby, Senior Analyst

Going to Extremes

Put/Call Ratio: The CBOE Equity Volume and Put/Call Ratio ( rose to 1.08 on 8/14/07. This is the highest level of Puts relative to Calls in more than three years, since August 2004. Also, it is more than 4 standard deviations above the one-year mean of 0.64. This means that the Put/Call Ratio is at an extreme of Bearishness sentiment, which is Bullish according to the Art of Contrary Opinion.

Some major stock price indices, but not all, fell steeply to new 4- to 5-month lows. VIX fear index rose, but only moderately, and VIX did not make a new high.

Very Bearish media reports of troubles in credit markets and hedge funds unsettled the markets. Investor confidence already has been shaken, and the media are adding fuel to the fire.

Stocks became very oversold during this 4-week downside shakeout. Price momentum oscillators (such as RSI 14, Stochastics 14, Plus DI Directional Movement 14, MACD Histogram, and CCI) hit their most Bearish extreme lows from 7/24/07 to 7/31/07 and have demonstrated positive divergences since then by failing to confirm lower lows in price.

As of Tuesday’s close, these momentum oscillators were holding above recent deeper oversold readings. Therefore, they are showing Bullish divergence as compared to some of the major price indices, such as the DJIA and S&P, which now are at new lows. Divergence at turning points is a typical technical phenomenon. Needless to say (I hope), oversold readings and divergences come with no guarantees. Please see my Disclaimer.

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

1.97% , MYY , Short 100% MidCap 400, MYY
1.54% , PSQ , Short 100% QQQ, PSQ
3.79% , MZZ , Short 200% MidCap 400 PS, MZZ
1.35% , DOG , Short 100% Dow 30, DOG
3.88% , NVDA , NVIDIA
2.81% , SDS , Short 200% S&P 500 PS, SDS
2.29% , QID , Short 200% QQQ PS, QID
1.27% , DXD , Short 200% Dow 30 PS, DXD
1.53% , SH , Short 100% S&P 500, SH
0.37% , IEF , Bond, 10 Year Treasury, IEF
0.60% , SLM , SLM CORP
0.14% , SHY , Bond, 1-3 Year Treasury, SHY
3.82% , ATVI , Activision Inc.
0.69% , SIRI , Sirius Satellite
0.47% , WAT , WATERS
0.27% , AGG , Bond, Aggregate, AGG
0.02% , BMET , BIOMET
0.33% , DBC , Commodity Tracking, DBC
0.05% , GLD , Gold Shares S.T., GLD
0.12% , TIP , Bond, TIPS, TIP
0.70% , GILD , Gilead Sciences Inc
0.27% , TLT , Bond, 20+ Years Treasury, TLT

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

-2.48% , IYC , Consumer Cyclical DJ, IYC
-2.56% , EKH , Europe 2001 H, EKH
-1.25% , PSJ , Software, PSJ
-5.17% , TBH , Telebras H, TBH
-1.74% , IWC , Microcap Russell, IWC
-1.32% , DGT , Global Titans, DGT
-2.26% , VBR , Value SmallCap VIPERS, VBR
-2.69% , IXG , Financials Global LargeCap Value, IXG
-1.18% , PWT , Growth SmallCap Dynamic PS, PWT
-2.18% , TTH , Telecom H, TTH
-2.71% , IYT , Transportation Av DJ, IYT
-1.80% , ONEQ , Growth LargeCap NASDAQ Fidelity, ONEQ
-1.64% , IWZ , Growth LargeCap Russell 3000, IWZ
-2.16% , ADRA , Asia 50 BLDRS, ADRA
-1.51% , FDL , Dividend Leaders, FDL
-1.53% , ELV , Value Large Cap DJ, ELV
-1.78% , IYY , LargeCap Blend Total Market DJ, IYY
-1.37% , VGK , European VIPERs, VGK
-1.27% , IGW , Semiconductor iS GS, IGW
-3.39% , PMR , Retail, PMR
-1.86% , MKH , Market 2000 H, MKH
-1.68% , ADRD , Developed 100 BLDRS, ADRD
-2.15% , JKD , LargeCap Blend Core iS M, JKD
-4.88% , HD , HOME DEPOT
-7.63% , GRMN , GARMIN LTD
-1.88% , VCR , Consumer D. VIPERs, VCR
-2.87% , VNQ , REIT VIPERs, VNQ
-4.64% , MCO , MOODYS CORP
-4.40% , LAMR , Lamar Advertising Company
-3.52% , NYT , NY TIMES STK A
-3.40% , ICF , Realty Cohen & Steers, ICF
-3.35% , RTH , Retail H, RTH
-2.04% , ELG , Growth Large Cap, ELG
-1.46% , FEZ , Euro STOXX 50, FEZ
-2.78% , HHH , Internet H, HHH
-1.91% , VBK , Growth SmallCap VIPERs, VBK
-2.71% , PEY , Dividend High Yield Equity PS, PEY
-7.59% , PHM , PULTE HOMES
-3.36% , RWR , REIT Wilshire, RWR
-1.12% , EWK , Belgium Index, EWK
-3.41% , VRSN , VeriSign Inc
-4.20% , EWZ , Brazil Index, EWZ
-3.73% , EMC , EMC
-3.88% , ILF , Latin Am 40, ILF

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

-0.66% Energy
-0.82% Health Care
-1.59% Consumer Staples
-1.68% Utilities
-1.75% Financial
-2.03% Technology
-2.54% Consumer Discretionary
-2.56% Industrial
-2.57% Materials

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

Energy (XLE) Bullish. Price held well above its recent low. Relative strength outperformed over the past 6 days since 8/6/07. Longer term, XLE is still in an uptrend compared to the S&P since 3/12/03. Overweight.

Technology (XLK) Bullish. XLK has been in a mild short-term correction since its price peak on 7/19/07. Longer term, XLK has been relatively strong compared to the S&P since its low on 7/24/06. Overweight.

Industrial (XLI) Bullish. Underperformed for the day but price did not break the recent low. Relative strength made a new high on 8/3/07. XLI has been relatively strong compared to the S&P since 8/9/06. Overweight.

Materials (XLB) Bullish. Price broke down to a new 4-month low, while relative strength made a new 2-month low on 8/14/07. But longer term, XLB has been relatively strong compared to the S&P since 9/27/00. Overweight.

Utilities (XLU) Improving. Held well above its recent price low. Relative strength has been in a rising trend since 7/30/07. Market weight.

Consumer Staples (XLP) Improving. XLP did not break its price low. It underperformed slightly over the past 3 days, but relative strength made a new 4-month high on 8/9/07. Previously, XLP was relatively weak compared to the S&P for nearly 5 years from 10/9/02 to 6/19/07. Market weight.

Health Care (XLV) Bearish. Price held above its recent low. Relative strength made a new 7-week high on 8/14/07 but made a new 5-year low on 7/19/07, thereby confirming a major downtrend. Underweight.

Consumer Discretionary (XLY) Bearish. Price broke below its recent low to close at a new 10-month low on 8/14/07. Relative strength made a new 11-month low on 8/14/07. Underweight.

Financial (XLF) Bearish. XLF held above its price low of 8/6/07, when it fell to a new 12-month low, thereby confirming a major downtrend. Relative strength made a new 6-year low on 8/3/07 but is holding above that low now. Still, major trends are down. Underweight.

Foreign stocks outperformed for the day, but the short-term trend looks uncertain. The short-term shakeout has spread to global markets. The next few days may be critical in determining the extent of the downside correction. The long-term trend may be 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 price held its lows, and relative strength outperformed. Relative strength outperformed since 5/17/07 and made a new 15-month high on 8/9/07. This appears to be a significant improvement.

Growth outperformed Value since 5/16/07. Longer term, the major trend of Growth/Value, mostly Bearish for seven years, appears to have turned Bullish.

Large Caps outperformed Small Caps for the day and since 4/19/06. Relative Strength of Large/Small Caps made a new 2-year high on 8/6/07.

Crude Oil prices rose slightly after their new 5-week low on 8/10/07. The longer-term trend is still Bullish. Crude made a new 10-month price high on 7/31/07. 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 lagged USO very slightly. 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 outperformed for the day. Longer term, StreetTRACKS Gold Trust ETF (NYSE: GLD) has underperformed the S&P since the GLD top on 5/12/06.

Silver has substantially 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 for the day and since 7/19/07. XAU also underperformed Gold since 1/31/06. In fact, Gold mining stocks have substantially underperformed both Gold and the S&P 500 for more than 20 years.

Inflation expectations turned down within a trend that has been falling since 6/22/07. The ratio of the price of bond TIPS to 10-year U.S. Treasury Notes indicates declining inflation expectations.

U.S. Treasury Bond prices rose modestly on low volume. Bonds appear to be consolidating after their low on 6/12/07. Since the price 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 jumped again to another new 5-week high. On 8/13/07, I said the dollar was “turning Bullish for the short-term. But, longer term,

the dollar fell to a new 15-year price low on 7/24/07, confirming the major trend as Bearish.”

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

0.52% US Dollar Index
0.51% Japanese Yen
0.37% 30Y T-Bond
0.02% Biotechs
-0.29% Japan
-0.42% Swiss Franc
-0.58% Euro Index
-0.64% Germany
-0.66% Energy
-0.76% Italy
-0.79% Austria
-0.80% British Pound
-0.82% Health Care
-0.83% Australian Dollar
-0.85% Sweden
-0.87% Hong Kong
-0.92% Value Line
-0.92% Health Care Products
-0.99% Hospitals
-1.12% Oil
-1.12% Belgium
-1.18% Health Care
-1.20% Spain
-1.29% Disk Drives
-1.30% Netherlands
-1.34% Canadian Dollar
-1.38% Drugs
-1.49% United Kingdom
-1.56% S&P 100
-1.57% Dow Industrial
-1.58% France
-1.59% Consumer Staples
-1.62% Computer Tech
-1.63% Switzerland
-1.66% DOT
-1.68% Utilities
-1.70% Nasdaq Composite
-1.71% Nasdaq 100
-1.75% Financial
-1.77% Natural Gas
-1.77% Oil Services
-1.82% S&P 500
-1.83% Russell 1000
-1.85% NYSE Composite
-1.86% Russell 3000
-1.86% Mexico
-1.87% Wilshire 5000
-1.88% S&P Small Caps
-1.88% S&P Mid Caps
-2.03% Technology
-2.03% Insurance
-2.03% Taiwan
-2.05% Commodity Related
-2.06% Chemicals
-2.06% Singapore
-2.09% Malaysia
-2.10% AMEX Composite
-2.11% Internet
-2.14% Banks
-2.16% Network
-2.17% Russell 2000
-2.21% Hardware
-2.22% Dow Composite
-2.23% Semiconductors
-2.25% Dow Utilities
-2.54% Consumer Discretionary
-2.56% Industrial
-2.56% Airlines
-2.56% Canada
-2.57% Materials
-3.05% South Korea
-3.10% Broker Dealers
-3.15% Paper
-3.22% Dow Transports
-3.30% Gold Mining
-3.36% REITs
-3.62% Retailers
-3.79% Australia
-4.20% Brazil

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

Looking beyond the recent short-term downside shakeout, longer term, the U.S. stock market has shown impressive Bullish resilience from the major low on 10/10/02 to the new all-time highs on 7/19/07. 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.

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 (as they have the great majority of the time since 2003) 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.