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.