By Robert W. Colby, Senior Analyst TraderPlanet.com
Biggest one-day loss since 8/9/07
Financials and Energy sectors fell the most.
Breadth was extremely Bearish.
Price momentum oscillators are now neutral and falling.
But the crowd already is Bearish, so the Art of Contrary Thinking would suggest looking for an upside surprise.
Stocks finished near their worst levels of the day. The market showed none of its old Bullish resilience.
Breadth data were at extremes. On the NYSE, declines led advances by 6.4 to 1, and the volume of declining stocks beat the volume of advancing stocks 14.0 to 1.
Based on the SPY ETF, the latest 2-day decline retraces 43% if the previous 7-day rebound up from the low of 8/16/07, and that qualifies as a normal price pullback.
By Friday 8/24/07, the major stock price indices had corrected their previous oversold condition, according to most of the standard short-term oscillators. Now, the Bears are hoping for a test or breaking of the August lows.
But since Put/Call Ratios already have been running significantly above their long-term median since 7/24/07, the Art of Contrary Thinking might suggest otherwise. As always, there are no guarantees either way.
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
2.19% , WEN , WENDYS INTL
2.13% , PSQ , Short 100% QQQ, PSQ
4.46% , MZZ , Short 200% MidCap 400 PS, MZZ
1.92% , RYAAY , Ryanair Holdings plc
1.53% , NEM , NEWMONT MINING
3.86% , DXD , Short 200% Dow 30 PS, DXD
4.18% , QID , Short 200% QQQ PS, QID
3.97% , SDS , Short 200% S&P 500 PS, SDS
2.46% , MYY , Short 100% MidCap 400, MYY
1.96% , DOG , Short 100% Dow 30, DOG
1.62% , SUNW , SUN MICROSYS
2.28% , SH , Short 100% S&P 500, SH
0.94% , LXK , LEXMARK INTL STK A
0.29% , KSE , KEYSPAN
0.51% , IEF , Bond, 10 Year Treasury, IEF
0.86% , LQD , Bond, Corp, LQD
1.21% , CI , CIGNA
0.96% , XMSR , XM Satellite R
0.31% , TAP , ADOLPH COORS STK B, TAP
0.67% , TXU , TXU
0.15% , BIG , BIG LOTS
0.30% , TIP , Bond, TIPS, TIP
0.26% , SHY , Bond, 1-3 Year Treasury, SHY
0.15% , ADBE , ADOBE SYS
0.19% , VIA.B , VIACOM STK B
0.14% , JBL , JABIL CIRCUIT
0.08% , XRAY , DENTSPLY International Inc
Bearish Stocks: Falling Price and Rising Volume
% Price Change, Symbol, Name
-3.54% , PKB , Building & Construction, PKB
-1.97% , ELG , Growth Large Cap, ELG
-2.20% , EWK , Belgium Index, EWK
-2.44% , XSD , Semiconductor SPDR, XSD
-9.24% , THC , TENET HEALTHCARE
-2.41% , IEV , Europe 350 S&P Index, IEV
-2.59% , IGW , Semiconductor iS GS, IGW
-2.39% , MKH , Market 2000 H, MKH
-4.26% , STT , STATE STREET
-4.20% , BDK , BLACK & DECKER
-5.56% , MXIM , MAXIM INTEGRATED
-5.30% , BK , BANK OF NEW YORK
-6.16% , CPWR , COMPUWARE
-2.83% , RFV , Value MidCap S&P 400, RFV
-2.51% , JKH , MidCap Growth iS M, JKH
-2.74% , FEZ , Euro STOXX 50, FEZ
-2.25% , IAH , Internet Architecture H, IAH
-3.19% , RZV , Value SmallCap S&P 600, RZV
-3.72% , DRI , DARDEN REST
-2.45% , ISI , LargeCap Blend S&P 1500 iS, ISI
-2.48% , VXF , Extended Mkt VIPERs, VXF
-5.20% , BBBY , BED BATH BEYOND
-4.14% , PFG , PRINCIPAL FINL
-1.43% , ITF , Japan LargeCap Blend TOPIX 150, ITF
-7.03% , CTX , CENTEX
-3.26% , COF , CAPITAL ONE FNCL
-2.99% , XLF , Financial SPDR, XLF
-2.87% , VCR , Consumer D. VIPERs, VCR
-4.37% , HMA , HEALTH MGMT STK A
-4.28% , QLD , Ultra QQQ Double, QLD
-4.35% , AXP , AMERICAN EXPRESS
-4.25% , PHM , PULTE HOMES
-4.61% , CSX , CSX
-3.30% , PWT , Growth SmallCap Dynamic PS, PWT
-2.28% , EKH , Europe 2001 H, EKH
-1.79% , EWL , Switzerland Index, EWL
-4.82% , RIMM , RESEARCH IN MOTION LTD
-2.44% , PXE , Energy Exploration & Prod, PXE
-3.64% , KG , KING PHARM
-4.38% , JCI , JOHNSON CONTROLS
-7.51% , MTG , MGIC INVESTMENT
-4.34% , GT , GOODYEAR TIRE
-4.87% , ACV , Alberto-Culver Co.
-6.01% , LEH , LEHMAN BROS HLDG
-3.90% , NIHD , NII Holdings, Inc.
-4.31% , MET , METLIFE
-4.84% , ADRE , Emerging 50 BLDRS, ADRE
-4.52% , EWW , Mexico Index, EWW
-2.20% , HHH , Internet H, HHH
-2.40% , NYC , LargeCap Blend NYSE Composite iS, NYC
Sectors: among the 9 major U.S. sectors, all 9 fell.
Major Sectors Ranked for the Day
% Price Change, Sector
-1.02% Health Care
-1.15% Consumer Staples
-2.41% Consumer Discretionary
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. Relative strength steadily outperforming since the low on 8/17/07. 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. Longer term, relative strength trending higher since 9/27/2000. 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.
Utilities (XLU) Deteriorating. This defensive sector turned up and outperformed from 7/30/07 to 8/9/07 but has sharply underperformed since 8/9/07. Underweight.
Health Care (XLV) Bearish. Relative strength turned down on 4/19/07 and 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. Falling steeply again. Relative strength made a new 6-year low on 8/3/07, turned up for two weeks, and now is in a falling trend again. Major trends are down. Underweight.
Foreign stocks outperformed since 8/17/04. Before that, the short-term, July-August market shakeout hit global markets harder than the U.S. market. 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 weakened, but only slightly. NASDAQ has outperformed since 8/17/07, underperformed 8/9/07 to 8/17/07, and outperformed since 5/17/07. Longer term, NASDAQ has outperformed for more than a year, since 8/8/06.
Growth sharply 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 eased slightly lower after closing above their August downtrend line on 8/24/07. The short-term correction since the high on 8/1/07 appears to be over, and 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 underperformed the USO 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 in price again. 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 an accelerating 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 rose to another new 3-month high. But since the price peak at 97.66 on 6/16/03, the long-term trend appears more Bearish than Bullish for iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT).
U.S. dollar recovered slightly over the past 2 days. But on Friday, it broke below the 61.8% retracement level of its short-term bounce up off the low on 8/6/07. 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:
1.23% Japanese Yen
0.34% 30Y T-Bond
0.22% Swiss Franc
0.13% US Dollar Index
-0.16% Euro Index
-0.31% British Pound
-0.88% Canadian Dollar
-0.92% Australian Dollar
-1.02% Health Care
-1.15% Consumer Staples
-1.20% Dow Utilities
-1.27% Disk Drives
-1.36% Health Care
-1.52% Health Care Products
-2.06% Oil Services
-2.07% Value Line
-2.10% Dow Industrial
-2.11% Dow Composite
-2.11% Computer Tech
-2.14% South Korea
-2.30% S&P 100
-2.33% Wilshire 5000
-2.34% Russell 1000
-2.35% S&P 500
-2.37% Nasdaq Composite
-2.37% Russell 3000
-2.39% S&P Mid Caps
-2.40% Gold Mining
-2.41% Consumer Discretionary
-2.43% Natural Gas
-2.44% Commodity Related
-2.48% Nasdaq 100
-2.51% NYSE Composite
-2.70% S&P Small Caps
-2.74% AMEX Composite
-2.74% Russell 2000
-2.75% Dow Transports
-2.84% United Kingdom
-3.45% Broker Dealers
-4.02% Hong Kong
To sum up the current position of the U.S. stock market:
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. That does not imply that the last word about it has been heard
Considering the big picture, beyond the recent short-term downside shakeout, 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.