Broad-Based Buying Boosts Market - Free Newsletter: Stalking Stocks with the Shark - 7/29/08

Broad-Based Buying Boosts Market - Free Newsletter: Stalking Stocks with the Shark - 7/29/08

Greetings Shark Investors:

Following the previous day’s drubbing, another pullback in oil, renewed strength in the U.S. dollar, strong earnings results, better than expected economic data and a positive response to news out of the financial sector all conspired to propel stocks higher on Tuesday. As we mentioned in our last Stalking Stocks newsletter, judging from the action on Monday, there is little doubt that somebody knew something regarding the planned announcement from MER after the bell that they would be conducting a fire sale of mortgage-related assets and raising additional common equity. However, as is often the case when those in the know have access to information the general public does not, we will often see a “buy the rumor, sell the news” scenario play out where traders go long ahead of ahead of an expected event and then sell once the news is out. It’s just that, in this case where the news was bad, there was likely a good deal of shorting the rumor and covering on the news.

Taken from that perspective, it is certainly understandable that indications were for a higher open to Tuesday’s trading session with sentiment getting a further boost on a blow-out quarter from steel-maker X and a sharp pullback for crude. As such, the market began the day to the upside but was unable to make much progress in the first thirty minutes. However, that all changed following the reading on July consumer confidence which, despite forecasts for a slight decline, actually showed an unexpected jump. Following that news, stocks shot sharply higher pretty much across the board, with financials, tech, industrials and consumer discretionary leading the way. Although the steep ascent slowed a bit after that, the averages continued to work their way higher as we worked our way into the afternoon.

While it was looking like we might finish out the day at what had, up to that point, been the highs of the day, another wave of buying hit in the final thirty minutes, sealing the deal on a very strong day for the bulls. Of course, the big question is to what degree can we trust this move. Certainly, there were several aspects to the action that are encouraging. The gains were broad-based and breadth was a very solid 11:4 to the positive. That said, it is impossible to tell how much of the huge 7.6% advance for the financials was a result of short-covering and rebound trading. While many pundits argued that the move by MER was likely a signal that financials are nearing an end to their massive asset write-downs, it’s hard not to wonder if instead it is just another sign that we lack any sort of real understanding of the problems that the housing and credit bubble created.

Regardless, we are faced with a market that is now in a position to put in a higher low, and given the dismal action, we have seen over the previous two months, there is a good chance that a move past short-term resistance levels will get those who aren’t positioned for strength right now nervous about being left behind. If buyers can build on this, and in particular, push the averages to fresh short-term highs, then we may start seeing investors get nervous about missing out on another move like we saw back in the March-May intermediate uptrend.

At the same time however, the one thing this market sorely needs – leadership – is still lacking. While many are hoping that the financials will assume that role, we suspect that there is more bad news in store for the sector, and outside of that, we have yet to see any group or area that might attract some real buying. The bottom line is that the sort of action we’ve seen recently really makes for an environment best suited to short-termers, but it certainly does not encourage more substantial position building. We’ll see if this turns into something more, but for right now, we need to take it for what it is – a counter-trend bounce – and avoid thinking that the worst is suddenly accounted for and priced into the market.