Stalking Stocks with the Shark - 04.29.08

Waiting For Ben - 04.29.08

Greetings Shark Investors:

Although the path they took between the bells was different, stocks ended another lackluster and low volume trading session in mixed territory on Tuesday as investors marked time ahead of tomorrow’s first look at first quarter GDP and FOMC interest rate decision. Outside of strong earnings reports from Master Card (MA) and US Steel (X), there was little by way of market moving news on the wires to greet investors this morning. Rather, a general uncertainty and lack of confidence as the Fed meeting got under way helped contribute to a slightly lower start to the day.

While we did see a brief flurry of buying in the more cyclical sectors immediately following the bell, sellers quickly stepped in to send the market lower through the morning, with most of the pressure being in the materials and energy sectors. However as we headed towards and into the New York lunch hour, those sectors were able to stabilize. Meanwhile, investors began to inch into financials, industrials and consumer discretionary, which in turn helped push the averages higher as the day wore on. However, after a spurt of buying just before the final hour sent the indices back near the highs of the session, the market rolled back over, ensuring another poor finish to the day.

Despite a pair of lackluster sessions to start the week, the rotational theme we’ve been talking about continued today, and that is likely the result of the anticipation that the Fed will be signaling an end to their rate cut campaign. As we said yesterday, much of the inflationary pressures we are facing are the direct result of the pressure a flood of cheap money has put on the US dollar. Thus, the weakness in those areas that benefited from a weak greenback have been pulling back, and investors have been building positions in names they think may inprove should the Fed adopt a more hawkish tone on Wednesday.

That said, such rotations are rarely so cut-and-dried. The major indices have been stagnating at resistance levels on very low volume, and when you combine that with an increasingly complacent market, you get conditions that warrant a high level of caution. As such, we feel that this market is ripe for a pullback, but the question is: If one does come, will it allow this market to see another higher low or will it turn into something more?

Without a doubt, this market has made some very good progress since putting in a double-bottom in March and we have seen a series of intermediate higher highs and lows. However, the fact remains that this market is still in a primary downtrend, and since the averages are getting a bit extended as they hover near recent highs, individual investors could do worse by raising caution levels.

The bottom line, then, is that it never hurts to take some profits in an uncertain environment and then reassess once a major market event has passed.