Daily Stock Market Commentary – 9/18/2007

The Energy stock sector relative strength made another new all-time high and remains the leading sector.

Inflation expectations have been rising in September.

New highs for Crude Oil and Gold.

The Financial sector underperformed, and that main trend is Bearish.

U.S. dollar’s minor “Dead Cat Bounce” is not significant.

On Monday, major stock price indices opened on a gap down and worked lower still. A mild afternoon recovery trimmed early losses somewhat. Advances-Declines and Up-Down Volumes ended net negative on both the NYSE and NASDAQ.

Bank of America now expects the credit market crisis to have a “meaningful impact” on its third quarter investment banking results. Such news might reinforce speculation about the risks of the liquidity, subprime, and credit-market crisis turning into a full-blown credit crunch which could lead to a recession. But despite actual news of more problems surfacing over the past month, nevertheless the stock market has been firming up since the downside shakeout low on 8/16/07. The stock market appears to be shrugging off bad news. Short-term momentum has eased back to neutral, but the major trend of the stock market remains Bullish.

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.

Energy (XLE) Bullish. Relative strength made a new high on 9/17/07. XLE has been strong compared to the S&P since 3/12/03. Overweight.

Technology (XLK) Bullish. Relative strength made a new 2-year high on 9/6/07. XLK has been relatively strong compared to the S&P since its low on 7/24/06. Overweight.

Industrial (XLI) Bullish. Stabilizing since the price low on 8/16/07. Longer term, XLI has been relatively strong compared to the S&P since 8/9/06. Overweight.

Materials (XLB) Market weight. The relative strength trend has improved significantly since the price shakeout low on 8/16/07, and the long term trend has been Bullish since 9/27/2000.
Utilities (XLU) Market weight. Relative strength has been improving since 6/22/07.

Consumer Staples (XLP) Bearish. This defensive sector’s relative strength has underperformed since 8/15/07. 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 another new 5-year low on 9/12/07. Underweight.

Financial (XLF) Bearish. Price hit a new 3-week low on 9/7/07 and a 13-month low on 8/16/07. Relative strength has been falling since 2/20/07 and made a new 6-year low on 8/3/07. Underweight.

Foreign stocks sharply underperformed on Monday. 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 may be still Bullish.

NASDAQ relative strength outperformed since 8/17/04. In addition, except for brief periods ranging between 1 to 6 days, NASDAQ has outperformed since 5/17/07. Longer term, NASDAQ has outperformed for more than a year, since 8/8/06.

Growth fell moderately but still outperformed Value since 8/20/07. Also, Growth outperformed Value since 5/16/07. It looks like a strong trend.

Small Caps have sharply underperformed Large Caps since 8/21/07. Small Caps also underperformed since 4/19/06. These trends deserve respect.

Crude Oil jumped to a new high. Both the crude futures and the U.S. OIL FUND ETF (AMEX: USO) prices made new one-year highs intraday before closing lower. Note that the USO fund is not a pure play on Crude Oil. Despite these short-term reversals, the longer-term trends for both remain Bullish.

The Energy sector price made another new 7-week high and outperformed the SPY. 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 Trust ETF (NYSE: GLD) hit a new 16 month high. Longer term, GLD has underperformed the S&P since the GLD top on 5/12/06 at 72.26, which is a level that probably will be significant to traders.

Silver underperformed Gold since 9/4/07. 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 ETF (GDX) eased lower but sill outperformed Gold since 8/16/07. GDX underperformed GLD since 7/19/07. The Gold Miners also underperformed the Gold Metal 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 have been rising short-term, since 8/31/07. But the larger trend has been falling since 6/22/07. So, the ratio of the price of bond TIPS to 10-year U.S. Treasury Notes indicates mixed inflation expectations in different time frames.

U.S. Treasury Bond prices are consolidating after a making new 9-month high on 9/10/97. That new high confirmed a significant uptrend. Long-term, Bonds have recovered more than half of their losses since the price peak at 97.66 on 6/16/03 for iShares Lehman 20+ Year U.S. Treasury Bond ETF (AMEX: TLT). Bonds remain reactive to news about the credit crisis: the worse the crisis, the higher the Bond prices.

U.S. dollar’s “Dead Cat Bounce” is not meaningful. It fell to a new 15-year low on 9/13/07. All trends are clearly Bearish. Traders will be watching 78.43, the low of 9/2/92.

The unfolding fallout from the subprime- and credit-market crisis moved investor sentiment toward the Bearish side in August. News of both damages and rescues is still leaking out little by little, but the stock market seems to be taking all the news in stride.

Considering the long term, 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 may 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 Bullish scenario.

Stocks generally are fully valued to over priced by long-term historical standards. Although that alone does not mean that stocks cannot resume their uptrends, 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.