By Robert W. Colby, Senior Analyst TraderPlanet.com
Market rally stalled? Or demonstrating resilience?
Now some are talking “test of lows”, but the market was resilient.
Stocks appear sensitive to the news stories of the day.
Foreign stocks outperformed again.
Energy sector was strong.
Materials sector pulled back normally following a large gain.
Excessive Bullish sentiment has been shaken out of the market.
Volatility has settled down, and market conditions appear to be returning to normal.
Big Drop in Bullishness for Investor Sentiment/Contrary Opinion: According to the weekly Investors Intelligence newsletter survey, the ratio of Bullish advisors to Bearish advisors plunged to 1.09 to 1 as of 8/22/07. This was way down from 2.99 to 1 on 7/26/07, which was the highest in nearly two years. As of 8/22/07, there were 40.6% Bulls and 37.4% Bears.
Traders appear to be adapting to the developing credit situation, which may or may not be as bad as feared. For the moment, at least, fear and volatility appear to be settling down, and market conditions appear to be returning to normal.
Reports of troubles in credit markets and hedge funds last week raised fear to Bear Market levels. The VIX fear index touched 37.5 during the session on 8/16/07, a level last seen on 10/10/02, which was the day the stock market made its Bear Market bottom.
The CBOE Equity Volume and Put/Call Ratio (http://www.cboe.com/data/PutCallRatio.aspx) was 1.02 on 8/16/07, 1.05 on 8/15/07, and 1.08 on 8/14/07. This was the highest level of Puts relative to Calls in more than three years, since August 2004. Also, it was more than 4 standard deviations above the one-year mean of 0.64. This means that the Put/Call Ratio was at an extreme of Bearishness sentiment, which was Bullish according to the Art of Contrary Thinking. (See my book, page 167.)
Stocks became oversold during the recent month-long 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 demonstrated positive divergences since then by failing to confirm lower lows in price.
This August, momentum oscillators held above July’s deeper oversold readings on all price drops. Therefore, they have been showing Bullish divergence as compared to major price indices, such as the DJIA and S&P, which fell to new 5-month lows last week. Divergence at turning points is a typical technical phenomenon. But, of course, 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
4.74% , SNPS , Synopsys Inc
2.36% , HAL , HALLIBURTON
6.47% , LTD , LIMITED BRANDS
3.08% , EWA , Australia Index, EWA
3.53% , CSC , COMPUTER SCIENCE
1.84% , AW , ALLIED WASTE IND
2.92% , NOV , NATIONAL OILWELL VARC0
1.89% , BLL , BALL
3.48% , SVU , SUPERVALU
0.49% , EFV , Value EAFE MSCI, EFV
0.92% , CFC , COUNTRYWIDE FNCL
2.60% , DISH , EchoStar Communications Corporation
1.09% , AEE , AMEREN
0.64% , XLV , Health Care SPDR, XLV
1.64% , ERTS , ELECTRONIC ARTS
1.28% , AYE , ALLEGHENY ENERGY
1.92% , EKH , Europe 2001 H, EKH
5.72% , TBH , Telebras H, TBH
0.77% , IYE , Energy DJ, IYE
0.69% , BIIB , BIOGEN IDEC
2.08% , ASH , ASHLAND
0.20% , VOX , Telecom Services VIPERs, VOX
0.09% , FDL , Dividend Leaders, FDL
0.32% , CR , CRANE
0.77% , ERIC.O , LM Ericsson Telephone Company
2.11% , EPP , Pacific ex-Japan, EPP
0.61% , SNA , SNAP ON
1.44% , SUNW , SUN MICROSYS
0.66% , ADRE , Emerging 50 BLDRS, ADRE
1.32% , IBM , IBM
0.31% , XLU , Utilities SPDR, XLU
0.57% , PHM , PULTE HOMES
0.90% , FII , FED INVESTORS STK B
0.24% , IYZ , Telecom DJ US, IYZ
0.38% , OMC , OMNICOM
0.78% , MZZ , Short 200% MidCap 400 PS, MZZ
1.92% , BSX , BOSTON SCIENT
0.16% , PUI , Utilities, PUI
0.33% , PSQ , Short 100% QQQ, PSQ
1.58% , GCI , GANNETT
0.70% , CKFR , Checkfree Corp.
0.63% , BMC , BMC SOFTWARE
0.96% , MXIM , MAXIM INTEGRATED
0.26% , PPH , Pharmaceutical H, PPH
2.18% , LEN , Lennar Corp. (LEN)
1.50% , CLX , CLOROX
0.52% , EWT , Taiwan Index, EWT
0.51% , MYY , Short 100% MidCap 400, MYY
0.80% , EFG , Growth EAFE MSCI, EFG
0.97% , ILF , Latin Am 40, ILF
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-0.55% , PMR , Retail, PMR
-3.68% , NSC , NORFOLK SOUTHERN
-1.38% , JKJ , SmallCap Core iS M, JKJ
-2.74% , NTRS , NORTHERN TRUST
-1.00% , RWR , REIT Wilshire, RWR
-1.21% , IJT , Growth BARRA Small Cap 600, IJT
-3.07% , AM , AMER GREETINGS STK A
-1.01% , BNI , BURLINGTON NORTH
-3.82% , FAST , Fastenal Company
-0.92% , PSI , Semiconductors, PSI
-0.98% , IJS , Value SmallCap S&P 600 B, IJS
-4.10% , JNS , JANUS CAPITAL
-0.83% , VBK , Growth SmallCap VIPERs, VBK
-1.98% , CAG , CONAGRA FOODS
-2.64% , KSS , KOHLS
-2.80% , CBE , COOPER INDS STK A
-0.37% , SDY , Dividend SPDR, SDY
-3.21% , INTU , INTUIT
-2.03% , MTB , M&T BANK
-0.18% , RZV , Value SmallCap S&P 600, RZV
-1.64% , SWK , STANLEY WORKS
-0.70% , PZI , Micro Cap Zachs, PZI
-1.51% , PDCO , Patterson Dental Company
-1.65% , MAT , MATTEL
-0.84% , HSIC , Henry Schein Inc
-2.46% , SANM , SANMINA
-1.36% , IYT , Transportation Av DJ, IYT
-1.95% , PMTC.O , PARAMETRIC
-4.05% , VC , VISTEON
-0.67% , IYM , Basic Materials DJ US, IYM
-3.27% , FHN , FIRST TENNESSEE
-0.58% , IJK , Growth MidCap 400 B, IJK
-2.55% , OMX , OFFICEMAX INC., OMX
-0.39% , JKH , MidCap Growth iS M, JKH
-1.07% , EWO , Austria Index, EWO
-2.89% , SNDK , SanDisk Corporation
-0.89% , PZJ , SmallCap PS Zacks, PZJ
-0.29% , RPV , Value S&P 500, RPV
-1.45% , VIA.B , VIACOM STK B
-1.77% , MYL , MYLAN LABS
-1.28% , JBL , JABIL CIRCUIT
-1.93% , MKC , MCCORMICK
-1.65% , DHI , D.R. HORTON, DHI
-1.96% , TIN , TEMPLE INLAND
-1.54% , PKB , Building & Construction, PKB
-1.78% , AMCC , APPLD MICRO CIRC
-1.11% , NWL , NEWELL RUBBER
-2.03% , WWY , WM WRIGLEY JR
-1.21% , IWM , SmallCap Russell 2000, IWM
-0.81% , ICF , Realty Cohen & Steers, ICF
Sectors: among the 9 major U.S. sectors, 6 rose and 3 fell.
Major Sectors Ranked for the Day
% Price Change, Sector
0.64% Health Care
0.04% Consumer Staples
-0.38% Consumer Discretionary
Industrial (XLI) Bullish. Relative strength has underperformed in the short-term since making a new high on 8/3/07. Longer term, XLI has been relatively strong compared to the S&P since 8/9/06. Overweight.
Technology (XLK) Bullish. XLK has been in a 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.
Utilities (XLU) Improving. This defensive sector turned up and outperformed from 7/30/07 to 8/9/07. Overweight.
Materials (XLB) Improving. Price broke a month-long downtrend line on 8/22/07, in more active trading, and relative strength rose sharply. Overweight.
Consumer Staples (XLP) Bearish. This defensive sector’s relative strength made a new 4-month high on 8/15/07 but has underperformed since. Underweight.
Health Care (XLV) Bearish. Short-term, this defensive sector’s relative strength made a new 7-week high on 8/15/07 but has fallen sharply since. Longer term, relative strength made a new 5-year low on 7/19/07, thereby confirming a major downtrend. Underweight.
Financial (XLF) Bearish. Relative strength made a new 6-year low on 8/3/07, turned up for two weeks, now is in a falling trend again. Major trends are down. Underweight.
Consumer Discretionary (XLY) Bearish. Price hit a new 10-month low on 8/16/07. Relative strength made a new 11-month low on 8/17/07. Underweight.
Foreign stocks outperformed over the past 2 days. The short-term, July-August market shakeout hit global markets harder than the U.S. market. But now volatility appears to be working for the upside. The EFA (the EAFE, international developed country stock markets, ex the U.S. and Canada) has substantially outperformed long term, since the Bull market started in 2002, and the secular trend still may be Bullish.
NASDAQ relative strength turned down. NASDAQ underperformed since 8/9/07, but it outperformed since 5/17/07. It could be in a temporary short-term correction of a larger uptrend. Longer term, NASDAQ has outperformed for more than a year, since 8/8/06.
Growth underperformed Value since 8/3/07. Longer term, Growth outperformed Value since 5/16/07. A mixed message.
Small Caps underperformed Large Caps. The relative strength of Small Caps still has lagged Large Caps since 4/19/06.
Crude Oil prices firmed slightly after making a new 8-week low on 8/22/07. This weakness appears to be part of a short-term correction since the high on 8/1/07. The longer-term trend still appears Bullish: 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 outperformed the USO since 8/3/07 but underperformed since 5/30/07. 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 again and underperformed the SPY since 8/15/07. 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 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.
U.S. Treasury Bond prices 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 fell again to close below the closes of the past 6 trading days. The dollar trend still may be up from its low on 8/6/07, but that was a new 15-year price low. It confirmed the major trend as Bearish.
2.24% Oil Services
1.49% Australian Dollar
0.92% United Kingdom
0.73% Canadian Dollar
0.64% Health Care
0.64% Natural Gas
0.62% British Pound
0.47% AMEX Composite
0.45% 30Y T-Bond
0.33% Computer Tech
0.25% Health Care Products
0.24% Health Care
0.20% Euro Index
0.18% South Korea
0.08% S&P 100
0.05% Broker Dealers
0.05% Swiss Franc
0.04% Consumer Staples
0.04% Commodity Related
0.02% NYSE Composite
0.00% Dow Industrial
-0.08% Dow Utilities
-0.11% S&P 500
-0.12% Russell 1000
-0.15% US Dollar Index
-0.20% Wilshire 5000
-0.21% Russell 3000
-0.25% Nasdaq 100
-0.38% Consumer Discretionary
-0.41% Dow Composite
-0.43% Nasdaq Composite
-0.45% S&P Mid Caps
-0.51% Disk Drives
-0.51% Hong Kong
-0.61% Value Line
-1.01% Japanese Yen
-1.13% Gold Mining
-1.17% S&P Small Caps
-1.29% Dow Transports
-1.29% Russell 2000
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.