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.