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.