By Robert W. Colby, Senior Analyst TraderPlanet.com
DJIA nearing 200-day simple moving average
Downside momentum shows force, but not as much as previously.
Sentiment is quite Bearish.
VIX fear index jumped to a new 4-year high at 30.67.
The CBOE Equity Volume and Put/Call Ratio (http://www.cboe.com/data/PutCallRatio.aspx) was 1.05 on 8/15/07 and 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.
Very Bearish media reports of troubles in credit markets and hedge funds have unsettled the markets. Investor confidence already has been shaken, and the media are adding fuel to the fire. Some Wall Street analyst’s comments also took a negative turn.
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 Wednesday’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.
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
3.04% , VRSN , VeriSign Inc
3.00% , DE , DEERE & CO
3.12% , NTAP , NETWK APPLIANCE
2.77% , HNZ , HJ HEINZ
3.41% , GNW , GENWORTH FINANCIAL (NYSE:GNW)
1.54% , SH , Short 100% S&P 500, SH
1.84% , WLP , WELLPOINT HEALTH
3.00% , SGP , SCHERING PLOUGH
1.32% , UNH , UNITEDHEALTH GRP
4.49% , QID , Short 200% QQQ PS, QID
3.74% , DXD , Short 200% Dow 30 PS, DXD
2.65% , MBI , MBIA
1.40% , STI , SUNTRUST BANKS
0.73% , DBC , Commodity Tracking, DBC
2.68% , SDS , Short 200% S&P 500 PS, SDS
3.41% , MZZ , Short 200% MidCap 400 PS, MZZ
0.97% , SVU , SUPERVALU
1.17% , FDC , FIRST DATA
1.17% , HAS , HASBRO
0.56% , AT , ALLTEL
0.77% , BAC , BANK OF AMERICA
1.02% , MHS , MEDCO HEALTH
2.30% , MKC , MCCORMICK
0.90% , MI , MARSHAL & ILSLEY
0.91% , HLT , HILTON HOTELS
1.31% , DOG , Short 100% Dow 30, DOG
1.47% , INTU , INTUIT
0.28% , TXU , TXU
1.68% , WWY , WM WRIGLEY JR
0.18% , IEF , Bond, 10 Year Treasury, IEF
0.90% , CZN , CITIZENS COMMS STK B
0.34% , SYMC , SYMANTEC
0.60% , CB , CHUBB
1.40% , LTR , LOEWS
0.42% , WYNN , Wynn Resorts L
3.26% , TJX , TJX
0.72% , JCP , JC PENNEY
0.37% , GILD , Gilead Sciences Inc
0.58% , HSY , HERSHEY FOODS
0.49% , PNC , PNC FINL SVC
0.64% , HUM , HUMANA
0.39% , WAT , WATERS
0.19% , AET , AETNA
0.27% , PEP , PEPSICO
0.31% , ESRX , EXPRESS SCRIPTS
1.71% , MYY , Short 100% MidCap 400, MYY
1.29% , WYE , WYETH
0.59% , BBT , BB&T
0.12% , NVLS , NOVELLUS SYS
0.78% , SCHW.O , CHARLES SCHWAB
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-2.13% , PMR , Retail, PMR
-2.16% , IJK , Growth MidCap 400 B, IJK
-1.75% , PUI , Utilities, PUI
-12.96% , CFC , COUNTRYWIDE FNCL
-1.51% , IGV , Software, IGV
-1.58% , RZG , Growth SmallCap S&P 600, RZG
-10.85% , A , AGILENT TECH
-2.51% , RZV , Value SmallCap S&P 600, RZV
-6.21% , ASD , AMER STANDARD
-2.48% , EZU , EMU Europe Index, EZU
-3.84% , PKB , Building & Construction, PKB
-3.85% , PXQ , Networking, PXQ
-4.40% , EWA , Australia Index, EWA
-6.07% , CIEN.O , CIENA
-3.45% , IYM , Basic Materials DJ US, IYM
-2.31% , PWJ , Growth Mid Cap Dynamic PS, PWJ
-3.23% , BDH , Broadband H, BDH
-4.42% , EPP , Pacific ex-Japan, EPP
-1.43% , PEJ , Leisure & Entertainment, PEJ
-2.58% , PHW , Hardware & Electronics, PHW
-1.83% , JKE , Growth LargeCap iS M, JKE
-2.11% , FDV , Value 40 Large Low P/E FT DB, FDV
-3.29% , PHO , Water Resources, PHO
-1.59% , ISI , LargeCap Blend S&P 1500 iS, ISI
-1.89% , VBK , Growth SmallCap VIPERs, VBK
-3.82% , PGJ , China LargeCap Growth G D H USX PS, PGJ
-1.67% , ELG , Growth Large Cap, ELG
-6.75% , LSI , LSI LOGIC
-7.65% , ABK , AMBAC FINL GRP
-2.03% , VB , Small Cap VIPERs, VB
-2.50% , VPL , Pacific VIPERs, VPL
-3.21% , TEK , TEKTRONIX
-5.41% , THC , TENET HEALTHCARE
-4.27% , APD , AIR PRODS & CHEM
-2.41% , EWG , Germany Index, EWG
-3.22% , VAW , Materials VIPERs, VAW
-4.21% , EWT , Taiwan Index, EWT
-4.25% , TMO , THERMO ELECTRON
-1.91% , IWV , LargeCap Blend Russell 3000, IWV
-7.27% , ETFC.O , E*TRADE FINANCIAL
-4.49% , ODP , OFFICE DEPOT
-1.75% , VOX , Telecom Services VIPERs, VOX
-1.86% , PWP , Value MidCap Dynamic PS, PWP
-3.63% , EWH , Hong Kong Index, EWH
-1.70% , PZJ , SmallCap PS Zacks, PZJ
-3.90% , EWM , Malaysia Index, EWM
-1.49% , VPU , Utilities VIPERs, VPU
-5.31% , JNPR , Juniper Networks Inc
-1.81% , IJJ , Value MidCap S&P 400 B, IJJ
-1.69% , PWO , OTC Dynamic PS, PWO
Sectors: among the 9 major U.S. sectors, all 9 fell.
Major Sectors Ranked for the Day
% Price Change, Sector
-0.24% Health Care
-0.53% Consumer Staples
-0.89% Financial
-1.07% Consumer Discretionary
-1.18% Industrial
-1.28% Technology
-1.35% Utilities
-2.51% Materials
-2.75% Energy
Looking beyond the daily fluctuation to the major trends (listed in order of relative strength):
Energy (XLE) Bullish. Price fell steeply for the day but held above its recent low. Relative strength turned down but only modestly. XLE is still in an uptrend compared to the S&P since 3/12/03. Overweight.
Technology (XLK) Bullish. XLK has been in a relatively 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. fell to a new 3-month low but outperformed for the day. 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 5-month low, while relative strength made a new 3-month low on 8/15/07. But longer term, XLB has been relatively strong compared to the S&P since 9/27/00. Overweight.
Utilities (XLU) Improving. This defensive sector’s price held above above its recent price low. Relative strength has been in a rising trend since 7/30/07. Market weight.
Consumer Staples (XLP) Improving. This defensive sector’s relative strength made a new 4-month high on 8/15/07. Price fell but did not break its July price low. XLP outperformed since 6/19/07. 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. This defensive sector’s price held above its recent low. Relative strength made a new 7-week high on 8/1507. But relative strength 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 8/15/07. Relative strength made a new 11-month low on 8/14/07. Underweight.
Financial (XLF) Bearish. XLF fell but held at 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 has outperformed since then. The sector may be acting sold out, for the moment at least. Still, major trends are down. Underweight.
Foreign stocks underperformed since 7/11/07, and price made a new 5-month low. The short-term shakeout now has hit global markets hard. The EFA (the EAFE, international developed country stock markets, ex the U.S. and Canada) broke decisively below its 200-day simple moving average.
NASDAQ price broke down below its 200-day simple moving average and to a new 4-month low. Relative strength underperformed.
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. Although Crude fell to a 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 have lagged USO since 5/30/07. But longer 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 in price but still 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) sharply 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 broke down to a new 5-month low. The trend 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 fell modestly on low volume. Bonds appear to be consolidating after their low on 6/12/07. But 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:
0.73% Value Line
0.46% US Dollar Index
0.42% Japanese Yen
-0.17% 30Y T-Bond
-0.21% British Pound
-0.24% Health Care
-0.30% Health Care
-0.53% Consumer Staples
-0.58% Euro Index
-0.66% Drugs
-0.67% Hardware
-0.71% Swiss Franc
-0.72% Health Care Products
-0.74% DOT
-0.85% Banks
-0.86% Canadian Dollar
-0.89% Financial
-0.94% Insurance
-1.07% Consumer Discretionary
-1.09% Switzerland
-1.18% Industrial
-1.21% Biotechs
-1.22% S&P 100
-1.26% Retailers
-1.28% Technology
-1.29% Dow Industrial
-1.31% REITs
-1.35% Utilities
-1.36% Australian Dollar
-1.39% S&P 500
-1.40% Dow Utilities
-1.45% S&P Small Caps
-1.49% Russell 2000
-1.49% Wilshire 5000
-1.51% Russell 1000
-1.51% Russell 3000
-1.53% Hospitals
-1.57% Computer Tech
-1.61% Nasdaq Composite
-1.65% Japan
-1.68% Internet
-1.79% NYSE Composite
-1.80% AMEX Composite
-1.91% Nasdaq 100
-1.91% Dow Composite
-2.06% S&P Mid Caps
-2.21% Austria
-2.22% Disk Drives
-2.27% Broker Dealers
-2.29% Spain
-2.32% Oil
-2.32% United Kingdom
-2.37% Natural Gas
-2.38% Canada
-2.41% Germany
-2.45% Italy
-2.46% Chemicals
-2.47% Network
-2.50% Semiconductors
-2.51% Materials
-2.63% Belgium
-2.67% Netherlands
-2.75% Energy
-2.86% France
-2.96% Commodity Related
-3.07% Oil Services
-3.20% South Korea
-3.26% Dow Transports
-3.63% Hong Kong
-3.64% Paper
-3.90% Malaysia
-3.93% Sweden
-4.05% Singapore
-4.21% Taiwan
-4.23% Mexico
-4.25% Gold Mining
-4.40% Australia
-6.46% Brazil
-7.18% Airlines
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.
