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.