Free Newsletter: Stalking Stocks with the Shark - An Absolute Reversal - 7/9/08

Free Newsletter: Stalking Stocks with the Shark - An Absolute Reversal - 7/9/08

Greetings Shark Investors:

Just one day after stocks experienced the sort of oversold rally that just about every market participant had been waiting for, the averages reversed course, giving up all of the previous day’s gains and more. Although oil was trading a bit higher in the early going following news that Iran had test fired missiles capable of reaching Israel, indications were for a slightly higher start to Wednesday’s trading session as investors wondered if we would see the previous day’s rally would continue. Also boosting sentiment early on was news that AA had reported earnings that were in line with consensus estimates.

As such, the market did open in positive territory, but it was obvious from the get-go that we wouldn’t be seeing any immediate follow-through, because the areas of the market which had led on Tuesday – industrials, consumer discretionary, tech, and especially financials – saw some quick selling, while the sectors which had lagged – energy and materials – were leading. As such, the market spent the entire morning and early part of the afternoon hovering near the lows of the session with modest losses.

However, just about two hours before the close, a fresh wave of selling hit, sending each of the major sectors – save utilities which remained steadily in positive territory as investors sought the stability of their dividend yields – as well as the indices, sharply lower. From that point and until the end of the day, just about the entire market sold off in a move reminiscent of the session last week in which no area of the market was left unscathed. Given the fact that each instance of strength we’ve seen over the past several weeks has quickly sputtered out, it’s not at all surprising that Tuesday’s oversold bounce failed – it's just remarkable that it did so in such a absolute manner the very next day.

We’ve been mentioning that the recent oversold conditions have increased the chances that we would see some sort of reflexive rally, but the lack of any real panicked selling hadn’t really set us up for the kind of counter-trend bounce we saw back in March and May. The fact that we hadn’t had a really good washout meant that there were likely plenty of folks sitting on losses who would be ready to sell into any strength. Once it became obvious that yesterday’s rally wasn’t going to continue, a little profit-taking turned into a full-fledged reversal.

Unfortunately, the bottom line remains the same, and we've been repeating it now for several months. This market is in a primary downtrend, and as such any action to the upside simply can not be trusted to last. We will certainly be presented with some opportunities for some quick trades as this turmoil plays out, but it’s simply pointless to even think about building longer-term positions until the pricing action proves there’s been a real change in this market’s character.