Stalking Stocks with the Shark - Sellers Take A Break - 5/22/08

Stalking Stocks with the Shark - Sellers Take A Break - 5/22/08

Greetings Shark Investors:

It was a somewhat positive, albeit choppy, day for the major indices on Thursday as the intense selling pressures over the previous two-and-a-half days finally eased. Although the recent weakness, mixed action in overseas markets, quiet news wires and a slight dip in crude prices ahead of the opening bell created ideal conditions for a relief bounce, stocks started the day just above the unchanged mark. As the morning developed, some initial dip buying in materials and energy fizzled out, while two of the hardest hit sectors so far this week, tech and financials, saw their bounces stick.

From the New York lunch hour on, each of the major S&P sectors as well as the averages settled into relatively tight trading ranges for the rest of the session, save the more defensive groups: utilities, healthcare and staples. Meanwhile, even though agricultural stocks did well on the day, there was some heavy selling in metals, mining and oils, with particular weakness in dry bulk shippers and solars. The implication is that the speculative activity that had been the hallmark of the rally off of March lows might be starting to really dry up, and instead of buying up stocks that ostensibly should have become cheap over the past few days, investors put their money into classic defensive areas.

All in all, it was a day of rest for the major indices, which, on average, gained 0.37% on breadth that was only slightly positive and volume that was very light. In addition, it is likely that we’re going to have to wait until next week for any sort of insight as to where we might be headed. The market is closed on Monday, and days ahead of three-day weekends tend to be thin and generally positive.

Be that as it may, it’s awfully hard to ignore the technical damage that was done so far this week, and even though the market has a little room to the upside, the fact remains that we are still in the midst of a primary downtrend. While the sell-off earlier this week may very well be long-forgotten if buyers can provide support and turn this in to another higher low for the averages, individual investors would be best served by ratcheting up their defenses as this action plays out.

Stalking Stocks with the Shark - Late-Day Reversal Negates Early Strength - 5/19/08

Stalking Stocks with the Shark - Late-Day Reversal Negates Early Strength - 5/19/08
Greetings Shark Investors:

As was the case when we finished out the week last Friday, a casual observation of the closing levels for the major indices masks what was a rather tumultuous day for the market. Stocks kicked off Monday’s trading session in a muted fashion as a slight dip at the open in consumer discretionary and financials was balanced by early strength in energy, materials and industrials. However, dip buyer were active right off the bat and stepped in to buy what initial weakness there was, pushing the broader market sharply higher throughout the morning and into the New York lunch hour.

While there was plenty of strong action across the board, once again investors focused a great deal of their attention on the same groups of stocks (oils, metals, mining and solar) that have led this market since the BSC bail-out in March. As we headed into the afternoon, the action began to get really frothy as investors chased components of ETFs such as the TAN, XES, XME and XOT higher. However, whether it was coincidence or a technical sell program, as soon as the S&P 500 hit the 1440 level mid-day, stocks turned sharply lower with the hottest momentum names taking the biggest hits. By the close, the indices had erased gains of about 1% to finish mixed on the day.

We’ve been saying for quite some time that, while this market has been acting quite well for the past several weeks, the leadership has been narrow, and as a result, many of stocks that investors have been chasing higher and higher have become extremely extended. As such, once some selling kicked in at an important technical level, holders of those recent high-flying names moved quickly to the exits to protect their gains. The fear of being left behind drove market players to pony up for stocks that had already made parabolic moves, but we often say that momentum works just as well, if not better, on the way down as it does on the way up.

Last Wednesday, we saw a similar late-day reversal, and the big question is if we will see the same sort of rebound we saw at the end of last week. With each of the major indices hovering right at their respective 200 day moving averages, it will be important for the dip buyers to defend their ground. There are likely plenty of investors out there who have been frustrated by this recent strength and have been looking for a bit of weakness in order to put some capital to work in the momentum names, and today’s reversal in those groups might have given them the opportunity to do so. That said, the biggest thing we need to watch for right now is complacency. Remember, we are still in a primary downtrend, and the longer and stronger bounces become, the greater the chances are that those who were too quick to embrace market strength will get caught when things reverse.

Stalking Stocks with the Shark - Intraday Recovery Caps Off A Good Week - 5/18/08

Stalking Stocks with the Shark - Intraday Recovery Caps Off A Good Week - 5/18/08

Greetings Shark Investors:

While the casual market observer might look at the essentially flat finishes for the averages on Friday and assume that it was a rather boring trading session, it was actually quite a productive day for the bulls. Over the past several weeks, the market has become increasingly focused on skyrocketing energy costs, and on an almost daily basis, vacillations in crude prices has sent investors scurrying from one sector to another. As such, even though early indications were for a somewhat higher start to the day, yet another new high for oil caused stocks in the materials and energy sectors to gap higher at the open while financials, consumer discretionary and technology stocks fall sharply.

From the start, the averages moved steadily lower until just before the New York lunch hour when the buyers decided to show up for work. Although there wasn’t any obvious catalyst, selling in the worst performing sector – financials – abated while tech and consumer discretionary began to turn higher. Add to that continued strength in those stocks that benefit from higher oil prices, and the net result was a market that began to inch its way higher as we worked our way through the afternoon. By the close, each average had recovered from losses of around 1% to finish flat on the day.

Whatever the reason for the turn-around, the fact is that once the buying began, so too did the performance anxiety. Despite the numerous reasons for the market to pull back, buyers keep stepping up to the plate, and that in turn is ratcheting up one of the most powerful forces in the market: the fear of being left behind. Technical resistance looms large, we’re entering a seasonally slow period, and there’s just no way that gas prices which are approaching $4 per gallon won’t have an affect on consumer spending. Still, keen insight and compelling arguments matter not when prices keep moving higher and investors are positioned defensively. What matters is making sure that you have long-side exposure.

With the Nasdaq above its 200 day moving average and the Dow and S&P 500 not far behind, its going to be interesting to see if this market will be able to continue to repair the massive technical damage it took between October and March. Even if it does, however, that doesn’t mean that prudent entry points in individual stocks are going to be easy to find. Many stocks on the best performing groups have become quite extended, and it’s going to be a challenge finding new opportunities without some sort of consolidation

Stalking Stocks with the Shark - Market Bounces Right Back - 5/15/08

Stalking Stocks with the Shark - Market Bounces Right Back - 5/15/08
Greetings Shark Investors:

Despite a very ominous late-day reversal the previous day, the bulls were once again in full control of the action on Thursday, spending most of the trading session pushing stocks higher. Despite a handful of pieces of economic data that came in just below expectations, including the Empire State Manufacturing index, Industrial Production and Weekly Jobless Claims, the market started the day essentially unchanged as investors tried to figure out what to make of Wednesday’s aggressive pullback from overhead resistance levels.

Since the BSC bail-out, the bears have been completely unable to gain a toe-hold, but many were beginning to wonder if we might see a bit of a pullback develop, especially given the vigor with which just about the entire market sold off as soon as the averages hit resistance. However, outside of a gap higher at the open for materials and energy stocks, which was triggered on another surge in oil prices, the action was rather tentative, with a good deal of weakness once again in the financials.

The early choppiness continued into the morning until a very sharp and sudden sell-off in crude sparked a wave of broad-based buying which sent each of the major S&P sectors, save materials and energy, rocketing higher through the New York lunch hour. The frenzy died down for most of the afternoon, but another wave of buying kicked in 30 minutes before the close, allowing the market to finish the trading session at highs.

We’ve been saying for quite a while now that we feel that this market is going to see another leg down in the near-term, but the resilience of the buyers have made placing any bets to the downside a good way to lose money. Although the previous day’s late reversal was a prefect example of a “crack” in the action we’ve been watching for, today’s price gains are an example of why the bears have been unable to press.

It is apparent that the prevailing psychology right now is the fear of being left behind. The low volume we’ve been seeing is, as we’ve said, an indication that the big money isn’t buying and is also a good clue that much of the spikes we’ve seen have been exacerbated by a good deal of short-covering. While market players may realize this, there’s no arguing the pricing action, and as a result they keep getting sucked back into the market.

While it is possible that the amount of cash on the sidelines and the persistent concerns over macro issues will allow this market to start to climb the wall of worry, we still don’t buy the whole “worst is over” argument. Be that as it may, individual investors will find that part of being successful in this market is knowing how to defer to the pricing action regardless of how compelling or rational the arguments are against what the market is saying.

Stalking Stocks with the Shark - Late Day Reversal Rains On Bulls' Parade - 5/14/08

Stalking Stocks with the Shark - Late Day Reversal Rains On Bulls' Parade - 5/14/08


Greetings Shark Investors:

The major indices finished Wednesday’s trading session in the green, but a wave of late selling took the shine off of what was looking to be a day of strong gains. Although indications were for a flat open early in the morning, index futures got a big boost from a better than expected reading on the consumer prices index.

As such, investors piled into the market at the opening bell, and except for a bit of initial selling in energy due to the early strength in the dollar, each of the major S&P sectors saw some strong early buying. Many more active investors often have difficulty when the market shoots higher right out of the gate because it is tough to feel like you have the right amount of exposure and even tougher to chase stocks that have already made big moves.

Be that as it may, the market continued to climb relentlessly throughout the morning and into the early afternoon before stalling out a little over an hour before the close. Once the averages hit the intraday highs from last week, investors wasted no time selling down positions and/or putting on fresh short positions. It’s been really difficult for the bears to press since the whole BSC thing, and they finally may have taken the opportunity to do so into resistance as we headed towards the home stretch. Although there was no clear catalyst for the selling, investors began to dump positions without prejudice, and before long, we were back to opening levels.

We’ve been talking a lot lately about how this market is having a difficult time deciding which way it wants to go, and today’s action was a good illustration of the interplay of all of those recent factors. Although the CPI data may have been almost laughably low to anyone who has to eat or drive to work, the economic data continues to be better than what we will typically see in a recession. However, if folks were so convinced that the “worst” really is indeed over, then why are we having such a hard time moving past overhead resistance levels?

Over the past few days, we’ve been saying that, while we fully expect this market to have to endure another bout of nasty selling, we continues to hold on rather nicely, today’s action notwithstanding. However, we’ve also been saying that we’d been looking for cracks, and today’s late-day reversal certainly fits the bill. There’s no telling how long this market can go without breaking down, however, and as such, individual investors can continue to look for shorter-term opportunities while keeping one hand close to the eject button.

Stalking Stocks with the Shark - Energy Continues To Dominate - 5/13/08

Energy Continues To Dominate - 5/13/08

Greetings Shark Investors:

Following the previous day’s broad-based gains, stocks finished Tuesday’s trading session in mixed territory as concerns over the financials tempered yet more buying in stocks that benefit from rising energy prices. Although indications were for a negative start to the day following news that WMT had provided disappointing guidance for the remainder of the year and that Oppenheimer had cut its earnings estimate for the major brokerages, sentiment got a boost on the heels of a better than expected reading on April retail sales.

As such, the averages opened just slightly below the unchanged mark, but heavy selling in the financials weighed on the broader market. As a result, we spent the better part of the morning moving steadily lower, with the indices hitting what would turn out to be the lows of the day just as crude prices shot back to highs before the New York lunch hour.

Once the selling eased a bit, however, the averages were able to inch higher into the afternoon on the backs of energy, materials, tech and industrials. Towards the end of the session, it was looking like the market might be able to eke out a finish in the green, but whatever buying interest that there might have been dried up after Moody’s indicated that both MBI and ABK – the two bond-insurers that received so much attention at the beginning of the year – were once again facing capitalization issues resulting from portfolio losses.

There’s little doubt that the gains we saw at the start of the week were decent, and all-in-all, this market is holding on rather well, especially given the headwinds that we’ve been discussing over the past few days. At the same time, however, the fact that this market has been unable to make any real technical progress in almost four weeks as volume continues to dry up really speaks to the uncertainty and lack of conviction that this market is facing at this point.

We continue to feel that, at some point, we will see another leg down once investors become discouraged with this lack of progress, but buyers are providing support for now. The spikes that we are seeing are keeping the bears off balance and are being exacerbated by some obvious short-covering rallies. That doesn’t engender a whole lot of confidence in this market’s ability to begin a new primary uptrend.

Still, there are some obvious pockets of momentum and traders are aggressively pursuing profits in a handful of industry groups including oils, solars and shippers. One key to success in the market is the ability to put aside big-picture thinking and respect the action that is in front of you. The market is not a rational beast and cares not how compelling and logical anyone’s arguments may be. The action that we’ve seen over the past couple of months may be setting us up for more pain down the road, but investors can end up missing out on some really good opportunities to make money by fighting the pricing action.

Stalking Stocks with the Shark - 5/12/08

Strong Gains, Terrible Volume- 5/12/08

Greetings Shark Investors,

Although it was looking like we were going to spend the day slogging though another lackluster trading session, the market kicked off the week by posting surprisingly large and broad-based gains. Indications were for a slightly higher start to the day as caution ahead of the bell following an earnings warning from FDX and a massive loss at bond-insurer MBIA was tempered by enthusiasm for big-cap tech after RIMM announced a new product offering. Meanwhile, after several days of strong gains, oil was slightly lower ahead of the bell.

As such, the averages open the day in the green, with some heavy selling in energy stocks while financials, technology and consumer discretionary saw some early buying. After the open, the action was a bit tentative for about the first hour, but the buyers suddenly got off their horse, pushing prices sharply higher throughout the morning and into the New York lunch hour. There were a few select areas of heavy buying, such as in big-cap tech and shippers, but all-in-all, investors pushed prices upward across the board. Even energy, which was the only sector to close in the red, recovered after some vigorous early profit-taking.

Interestingly, the market paused to catch its breath as we entered the afternoon just as the S&P 500 hit 1400, which has acted as an important technical level so far this year. However, “pause” is the key word here, because a fresh wave of buying kicked in about two hours before the close, sending each major sector, save energy, and index into the close at (or very close to) the highs of the day.

Gains of over 1% for the indices, decent breadth, and strength in retailers and banks all indicate a good day for the bulls. Certainly, they deserve the benefit of the doubt right now, but once again, we had a day of very low volume – the lowest of the year – and the averages continue to be entrenched within the bearish wedges we’ve been talking about over the past few days. From a technical perspective, the market has room for some upside here, but the big question is how long this can last. Earnings season is done with, we are entering a seasonally slow period, and sentiment polls show a high level of optimism.

As such, conditions are ripe for some downside, but at the same time, buyers have been consistently stepping up to the plate, making it really difficult for the bears to gain a toe-hold. For now, there is some good action in the momentum areas, but we need to be very careful and make sure we are watching for cracks in the action.

Stalking Stocks with the Shark - 5/11/08

Selling Pressures Remain - 5/11/08


Greetings Shark Investors:

Although the market finished out the Friday's trading session in the red on more bad news for the financial sector and another day of record high oil prices, the overall action was rather lackluster, but at the same time, there were some interesting pocket of activity. Index futures pointed towards a negative start to the day early in the morning as crude spiked to fresh highs and Dow-component AIG reported first quarter results that were much worse than anticipated. That said, we've been talking a lot recently about how this market has been due for a pullback, and at this point, it is highly unlikely that investors are all that surprised by some not-so-hot results from an insurance company and high energy prices. Rather, we suspect this market was simply ready to do a little selling.

As such, the major indices opened the day well into negative territory. Interestingly, however, even though the dollar was weaker once again, there was some heavy profit-taking initially in the typical "weak-dollar" plays, including gold, materials and energy. Also, even though they gapped lower at the open, investors busied themselves by purchasing financial stocks after several days of weakness in that group and in the face of persistent weakness in AIG and C. Meanwhile, there was some very good action to be found in energy stocks despite the early pressure in that area.

However, you'd never be able to tell from the major indices that there was so much going on in select areas. Volume was low, sentiment was tempered, and the action in the broader market was lackluster. Outside of a couple of attempted bounces, the averages spent the better part of the day hovering near lows, but even though this market started the day looking for an excuse to sell, the downward pressure never threatened to gain traction. From a strict support / resistance perspective, the averages are once again hovering near significant technical levels as this market tries to figure out where it wants to go.

On the one hand, there are plenty of investors who are desperate to believe that the worst really is over and that they need to put their money to work quickly lest they miss out on the next great bull market. On the other hand, however, we are entering a seasonally slow period and given the fact that we are running out of upside catalysts here, it is understandable why investors have lacked the confidence to push prices past meaningful resistance levels.

The bottom line is that even though we except to see more weakness in the near-term, individual investors would be best served, as always, by not being too anticipatory and waiting for definite signs of weakness before pressing any bets to the downside.

Stalking Stocks with the Shark - 5/8/08

Downward Pressure Eases, But Troubling Signs Remain - 5/8/08

Greetings Shark Investors:

Stocks were able to recover modestly on Thursday to post modest gains, but even though the session was subdued, some common themes remained firmly in place. Indications were for a sharply higher open to the day as investors looked for a quick rebound from the previous day’s selling. Sentiment remained positive ahead of the bell following what were, on the whole, some pretty decent chain store sales numbers (which got a boost from the extra shopping day around Easter) as well as a sharp decline in weekly jobless claims.

As such, the market opened the day in the green, but the early gains weren’t all that impressive as financials and consumer discretionary acted as the main drags. However, any buying interest was once again concentrated in materials and energy stocks on the heels of higher oil prices and a weaker dollar. Certainly, continued leadership from these groups, especially when prompted by continued weakness in the greenback, which saw a choppy session on news that both the Bank of England and the ECB left interest rates unchanged and maintained a hawkish tone in their respective statements.

That leader / laggard relationship persisted for the remainder of what turned out to be a rather choppy session, with the major indices finishing in the middle of its intraday trading range. We’ve talked a lot about how the prevailing psychology over the past several weeks has been the fear of being left behind, and that has been one of the major factors behind this market finding steady underlying support.

However, over the past several days, it has become clear that each of the major indices has formed what is known as a “bearish wedge”, where a chart will rise within an increasingly narrow range on decreasing volume. We’ve been pointing out over the past several weeks that the consistently low volume has indicated that the big institutional money has not been participating, which in turn means that there will be little support should the recent intermediate uptrend be broken. Moreover, this troubling technical pattern has really started to take shape just as oil is spiking to record highs and the averages are approaching their 200 day moving averages.

This market has plenty of hurdles to overcome as we move forward, and we are concerned that we could see another leg down here in the near term.

Stalking Stocks with the Shark - 5.6.08

Market Moves Higher Despite Headwinds - 5.6.08

Greetings Shark Investors:

Despite yet another spike in oil prices and more dismal earnings reports from the financial sector, the major indices were able to overcome a shaky start and finish Tuesday’s trading session in positive territory. Early indications were for the previous day’s pullback to continue following a much larger than expected first quarter loss from Fannie Mae (FNM) and new record highs for oil after Goldman Sachs’ note arguing that crude prices could reach $200 per barrel over the next 24 months.

As such, the market began the day well into the red. Unsurprisingly, most of the losses were concentrated in financials, technology, industrials and consumer discretionary while materials and energy stock, in particular, helped to counter the early pressure. However, after moving to what would turn out to be the worst levels of the session about 30 minutes after the bell, buyers began moving aggressively in the early laggards, especially financials. That broad-based move sent the market off its lows, and the indices spent the rest of the morning climbing steadily higher.

Although the buying leveled off in the early afternoon, a fresh wave of buying kicked in as the final hour approached, allowing the averages, as well as each of the major sectors to finish at the highs of the day. Without a doubt, the ability of this market to recover from the initial selling pressures, especially in the face of oil reaching $122 per barrel, and the willingness of the market players to buy weakness is encouraging.

While we’ve been looking for a pullback here as this market deals with some significant overhead resistance, a promising sector rotation that looks to have sputtered out, and a lack of upside catalysts, the prevailing psychology right now seems to be the fear of missing out. Each time this market has pulled back since the lows of March, buyers have provided support right where they needed to, and that can begin to gain momentum in its own right. There’s obviously money out there that needs to be put to work, and when we throw that in with persistent worries over the economy, we have all the necessary ingredients for this market to start climbing the wall of worry,

From a technical perspective, the averages are in pretty good shape, but we can’t for one second forget that we are still in a primary downtrend. CSCO reported earnings, and as such, marks the end of the big first quarter reports. It will be interesting to see what happened now with that catalyst out of the way.

Stalking Stocks with the Shark - 04.30.08

Fed Punts On Weak Dollar And Inflation - 04.30.08

Greetings Shark Investors:
Although the major indices spent the majority of the day sporting decent gains as investors looked forward to a positive response to the FOMC interest rate decision, the reaction was anything but, and the market suffered through a late day sell-off to finish Wednesday’s trading session in the red.

Despite indications for a somewhat softer open to the trading day early in the morning, better than expected readings on first quarter GDP as well as the ADP employment report helped the index futures - as well as European markets - moved higher as we approached the bell. As such, the market began the day in the green, but interestingly, the initial leadership was not in the areas that many had been expecting.

As we’ve been discussing over the past few days, market players have been anticipating that the Fed would acknowledge the fact that the parabolic rise in commodity prices have begun to really hamper the growth prospects for the economy and that they would adopt a more hawkish tone when they announced their interest rate decision later in the day. As a result, those stocks that have been benefiting from a weaker dollar have spent the past several sessions pulling back, while the dollar has bounced and investors have tentatively dipped their toes back into financials, technology and consumer discretionary names.

However, even though materials and energy stocks popped at the open and some heavy selling pressures hit the financials, as the morning wore on and we worked our way closer to the Fed decision, that rotational theme began to develop once again. Unfortunately for those who placed big bets ahead of the news, however, the Fed wasn’t playing along.

While they did deliver the 25 basis point rate cut that was widely expected, the wording in their policy statement wasn’t nearly as hawkish as many had hoped. In it, they reiterated their expectation that inflationary pressures would “moderate in coming quarters” as commodity prices “leveled out”, and that continuing turmoil in the credit and housing markets would “likely weigh on economic growth over the next few quarters.” Outside of a nod to the substantial actions they had already taken, there was no hint as to whether or not they were done with cutting rates for the time being.

Basically, the Fed punted on the issue, and once the typical whipsaw action settled down after the news was digested, the market lost all it footing and fell quickly into negative territory as we headed into the final hour of trading. Not surprisingly, most of the selling was concentrated in tech and financials while the euro, the yen and gold bounced strongly.

Over the past several days, we’ve been saying that, while we expect a rotational theme to play out as we move forward, we didn’t expect the transition to be smooth, and today’s reaction to the Fed was certainly a bump in the road. We’ve also been warning that, with the averages bumping up against overhead resistance, we would be surprised to see a pullback as market players move to protect some of their recent profits.

Should we see this pullback develop over the next several days, however, it will be essential for the averages to find support above recent lows. This market has established a nice intermediate uptrend since putting in a double-bottom last month, and it will be important for the series of higher highs and higher lows we’ve seen since then to continue in order for this market to gain the sort of momentum required for it to push convincingly past lateral resistance levels.