04/21/2008 - Market Review

Greetings Shark Investors:

Given last week’s big gains, no one was all that surprised to see a bit of profit-taking on Monday, but despite a bit of choppiness between the bells, stocks held on nicely to finish the day in mixed territory. Earnings were once again the focus as we headed towards the opening bell, but unlike last week’s reports which surprised to the upside, a couple of big misses by Bank of America (BAC) and National City (NCC) set a downbeat tone that lasted through the day.

As such, the averages opened the day in negative territory, but after falling to what would turn out to be session lows about an hour into trading, investors stepped and pushed the market higher as we worked our way into the New York lunch hour. And, while a fresh wave of selling hit as the afternoon got underway, buyers again provided some support, sending stocks higher and into a respectable, albeit mixed, finish to the day.

Meanwhile, a couple of recent themes reemerged as the new week got underway. First was the continued attention paid to a few select groups of stocks, including those in the oil, steel, coal, solar, mining and agricultural industries. To a certain extent, the relative outperformance in those areas is to be expected since they stand to benefit the most from the parabolic rise in commodity prices. Moreover, that’s where the action has been over the past few weeks, so given the lackluster action in the rest of the market, it makes sense that traders will stick with what has been working.

The other notable aspect was the complete lack of volume. We’ve been pointing out recently that volume has been at levels typically seen on holidays, and that suggests a level of uncertainty amongst market participants. Still, with the number of times promising bounces have failed into overhead resistance, it’s hard to begrudge any hesitation here.

The bottom line, however, is that these are the things that need to change if this month-long rally is going to continue. The areas of the market that have been attracting the hot money are starting to get really extended, and we need to see that attention turn to other groups once the profit-taking kicks in.

Regardless, the major indices continue to be in good shape from a technical perspective. The key will be to see if expectations for earnings remain low enough that investors will keep buying mediocre reports.

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