By Robert W. Colby, Senior Analyst

Good Trend Day on Friday

Materials and Energy were the strongest sectors.

Foreign stocks outperformed again.

Excessive Bullish sentiment has been shaken out of the market.

Price momentum oscillators, oversold in late July, have been mostly rising since.

Volatility has settled down, and market conditions appear to be returning to normal.

On Friday, major stock price indices opened little changed, rose steadily most of the day, and finished at their best levels of the day by the close. On the NYSE, advancing stocks beat declining stocks 3.4 to 1, and the volume of advancing stocks beat the volume of declining stocks 5.3 to 1.

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 ( 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

1.21% , IWV , LargeCap Blend Russell 3000, IWV
2.23% , EWQ , France Index, EWQ
1.68% , PWT , Growth SmallCap Dynamic PS, PWT
6.38% , GPS , GAP
5.09% , QLGC , QLOGIC
5.24% , TLAB , TELLABS
5.36% , WYNN , Wynn Resorts L
1.34% , VCR , Consumer D. VIPERs, VCR
1.78% , PEJ , Leisure & Entertainment, PEJ
5.50% , XMSR , XM Satellite R
3.71% , KR , KROGER
5.60% , DISH , EchoStar Communications Corporation
1.28% , JKK , Growth SmallCap iS M, JKK
1.28% , IYC , Consumer Cyclical DJ, IYC
1.85% , ADRA , Asia 50 BLDRS, ADRA
2.01% , PXQ , Networking, PXQ
5.02% , NBR , NABORS
1.29% , EWN , Netherlands Index, EWN
2.77% , WFMI , Whole Foods Market Inc
1.14% , RPV , Value S&P 500, RPV
4.42% , DYN , DYNEGY
2.27% , FEZ , Euro STOXX 50, FEZ
3.66% , MON , MONSANTO
0.98% , RPG , Growth S&P 500, RPG
0.98% , RFV , Value MidCap S&P 400, RFV
3.04% , EZA , South Africa Index, EZA
0.99% , IWW , Value LargeCap Russell 3000, IWW
1.54% , PWO , OTC Dynamic PS, PWO
5.56% , SANM , SANMINA
1.04% , IWC , Microcap Russell, IWC
1.14% , PWV , Value LargeCap Dynamic PS, PWV
3.90% , TBH , Telebras H, TBH
1.32% , LLY , ELI LILLY
1.58% , EWL , Switzerland Index, EWL
0.79% , PEY , Dividend High Yield Equity PS, PEY
3.45% , BIG , BIG LOTS
2.11% , PPA , Aerospace & Defense, PPA
2.88% , TJX , TJX
1.45% , VIS , Industrials VIPERs, VIS
5.16% , ROST , Ross Stores Inc
0.79% , XBI , Biotech SPDR, XBI
3.08% , PTV , PACTIV
3.53% , PGJ , China LargeCap Growth G D H USX PS, PGJ

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

-1.63% , GTW , GATEWAY
-1.05% , ANDW , ANDREW
-1.31% , SH , Short 100% S&P 500, SH
-1.89% , DISCA , Discovery Holding Co.
-0.73% , FPL , FPL GROUP INC
-1.20% , MYY , Short 100% MidCap 400, MYY
-0.47% , ADBE , ADOBE SYS
-0.36% , RFG , Growth MidCap S&P 400, RFG
-0.90% , MU , MICRON TECH
-0.90% , CTB , COOPER TIRE
-0.79% , TRB , TRIBUNE
-1.48% , CTSH , Cognizant Technology Solutions
-0.40% , MHP , MCGRAW HILL
-0.70% , WWY , WM WRIGLEY JR
-0.02% , BMET , BIOMET

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

2.34% Materials
2.14% Energy
2.01% Consumer Discretionary
1.42% Technology
0.82% Industrial
0.71% Consumer Staples
0.61% Health Care
0.61% Utilities
0.35% Financial

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

Energy (XLE) Bullish. Relative strength turned up on 8/7/07. Longer term, XLE has been strong compared to the S&P since 3/12/03. 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.

Industrial (XLI) Bullish. Outperformed since 8/17/07, following a brief period of underperformance from 8/3/07 to 8/17/07. Longer term, XLI has been relatively strong compared to the S&P since 8/9/06. Overweight.

Materials (XLB) Improving. Outperformed since 8/17/07. Relative strength trending higher since 9/27/2000. Overweight.

Utilities (XLU) Neutral. This defensive sector turned up and outperformed from 7/30/07 to 8/9/07 but has underperformed since 8/9/07. Market weight.

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.

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.

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.

Foreign stocks outperformed each of the past 3 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 up. NASDAQ has underperformed since 8/9/07, but it has 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 outperformed Value since 8/20/07. Also, Growth outperformed Value since 5/16/07. It could be a trend.

Small Caps have underperformed Large Caps since 4/19/06. I would give this trend respect.

Crude Oil prices closed above their August downtrend line. The short-term correction since the high on 8/1/07 may or may not be over, but 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 rose but underperformed the SPY again, and 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.

Inflation expectations are in a downtrend. 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 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 steeply, breaking below the 61.8% retracement level of its short-term bounce up off the low on 8/6/0. That low was a new 15-year price low, and it confirmed the major trend as Bearish.

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

3.81% Brazil
3.09% Sweden
3.04% Singapore
2.63% Belgium
2.40% Gold Mining
2.34% Materials
2.32% Italy
2.31% Oil
2.26% Hong Kong
2.23% France
2.22% Austria
2.19% Oil Services
2.14% Energy
2.14% Mexico
2.09% South Korea
2.01% Consumer Discretionary
1.97% Retailers
1.89% Commodity Related
1.87% Spain
1.87% Taiwan
1.84% Disk Drives
1.80% Network
1.73% Hardware
1.68% Computer Tech
1.62% Natural Gas
1.61% Germany
1.58% Switzerland
1.57% Australia
1.53% Nasdaq 100
1.49% United Kingdom
1.48% AMEX Composite
1.44% S&P Small Caps
1.44% Paper
1.42% Technology
1.41% S&P Mid Caps
1.40% Chemicals
1.38% Nasdaq Composite
1.35% NYSE Composite
1.35% Russell 2000
1.29% Netherlands
1.25% Airlines
1.20% Broker Dealers
1.19% Russell 3000
1.19% Wilshire 5000
1.17% Russell 1000
1.17% Internet
1.15% S&P 500
1.13% Dow Transports
1.12% S&P 100
1.11% DOT
1.08% Dow Industrial
1.08% Malaysia
1.05% Australian Dollar
1.01% Hospitals
1.00% Dow Composite
0.98% Canada
0.87% Drugs
0.86% Health Care Products
0.82% Industrial
0.81% Insurance
0.81% Euro Index
0.76% Biotechs
0.74% Health Care
0.71% Consumer Staples
0.68% Value Line
0.63% Dow Utilities
0.61% Health Care
0.61% Utilities
0.59% Semiconductors
0.53% Banks
0.50% Japan
0.44% British Pound
0.43% Swiss Franc
0.35% Financial
0.25% 30Y T-Bond
0.18% Canadian Dollar
0.02% Japanese Yen
-0.14% REITs
-0.55% US Dollar Index

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.