Free Newsletter: Stalking Stocks with the Shark - 07/10/2008 10:18 PM:

Free Newsletter: Stalking Stocks with the Shark - 07/10/2008 10:18 PM:

Greetings Shark Investors:

Although the market was able to recover some of the points it lost the previous day, the trip between the bells on Thursday was anything but smooth. Indications were for a positive start early in the morning as the index futures pointed to a slight rebound from Wednesday’s big losses, but sentiment got a big boost after WMT reported that June same store sales numbers came in well ahead of estimates and raised their second quarter guidance. However, even though there was little reaction to the weekly unemployment data – which showed a lower number of new application for unemployment benefits – the mood soured as we headed towards the opening bell as several apparel retailers reported that sales had declined last month. The implication is that consumers may be spending their rebate checks, but they’re getting spent on necessities.

As such, the market did start the day in positive territory, but the trading was quite choppy and directionless in the early going. While we did see a bit of a rebound in tech, industrials, materials and energy, former St. Louis Fed president Poole put renewed pressure on the financials after he said that FNM and FRE were “technically insolvent.” That said, even though consumer discretionary started weak and trended lower for the entire day, the rest of the sectors began to inch their way higher as we worked our way towards the New York lunch hour and into the early afternoon. However, about two hours before the close, the market quickly fell back to the lows of the day following a sudden spike in oil which had been precipitated by threats of increased violence in Nigeria. They didn’t stay at those levels for long, though, because the indices bounced right back up to finish the day with average gains of 0.82% on breadth that was just in positive territory and volume that was again lighter than it had been the previous day.

There were sure a lot of balls up in the air today, and as a result, it’s difficult to really pinpoint any one driver that had an outsized influence on the market. Certainly, oversold market conditions, the sudden spike in oil, very real concerns over FMN and FRE, and nervousness following Wednesday’s reversal of Tuesday’s gains all played a part, but sometimes the better approach is to simply take the new information that we gain and simply assimilate it rather than try to come up with some penetrating insight. There are plenty of issues that this market continues to wrestle with and no shortage of potential catalysts that could trigger a big swing one way or another.

Investors are obviously nervous and are hesitant not to lock in short-term gains. Certainly, given how many times folks have been burned chasing strength over the past several weeks, it shouldn’t be surprising to see this market have a hard time making much progress to the upside. There’s little doubt that it would take much to trigger a fresh leg lower, but at the same time, there are plenty of shorts out there who are sitting on some good gains, and a short-covering rally could pick up steam in an instant.

Right now, conditions are ripe for this market to go either way right now. However, the bottom line remains the same. We are in a downtrending market, and that means we need to maintain an aggressively defensive posture.