Free Newsletter: Stalking Stocks with the Shark - Bailout Plans Fail To Inspire - 7/14/08

Free Newsletter: Stalking Stocks with the Shark - Bailout Plans Fail To Inspire - 7/14/08

Greetings Shark Investors:

The market suffered through another disappointing trading session as worries regarding the health of regional banks outweighed the latest government bailout plans. It was a busy weekend as news spread late Friday that the FDIC had moved to seize IndyMac (IMB) after a run on the bank caused it to fail. While that event had the potential to put significant pressure on the market when it opened on Monday, the Treasury Department and the Federal Reserve announced a plan to shore up both FNM and FRE just before Asian markets opened late Sunday night. The plan would allow Treasury to increase its credit lines to the GSEs and buy their stock to ensure they had enough capital to operate. The Fed also announced that their discount window would be available to both companies.

As such, the market started the day by gapping sharply higher, but even though the GSE news had the potential to be the sort of catalyst that would trigger a decent bounce, sellers hit the open hard, sending FNM and FRE right back to the flat-line. In fact, just about the entire market, save energy, saw heavy selling pressure, but the worst action was in the financials in general and the regional banks in particular as fears that there might be more bank failures spread. For the rest of the morning and through the New York lunch hour, stocks continued to move steadily lower before finally reaching what would turn out to be the lows of the session just as we entered the afternoon.

It was a bumpy ride for the rest of the day as a modest recovery failed to gain much traction. But just as it looked like the averages were headed for the lows once again, what can only be described as a massive buy program kicked in, sending every area of the market straight up. However, as has been the case each time we’ve seen any action to the upside, that bounce ended just as soon as it began. By the end of the day the indices lost, on average, 0.83% on breadth that was about 2:1 to the negative. Poor results, to be sure, but the final results were minor when compared to the bloodletting in the regional banks. For example, the KBW Regional Banking Index ETF (KRE) lost a whopping 8.25% while WM, FHN and ZION, dropped 34.75%, 24.78% and 23.20%, respectively.

Certainly, those terrible results highlight the fact that this market still has little grasp on the problems which originated with the subprime debacle and began to surface early last year. The biggest difficulty that investors face right now is that the current oversold conditions make it difficult to really press to the downside, but at the same time, the inability of this market to hold on to any gains makes pursuing any longs a losing strategy. Instead of getting the sort of panicked washout that would set us up for a more tradable bounce, we end up having to deal with a market that continues to trend lower, punctuated by brief bouts of action to the upside that gives trapped longs an opportunity to sell and shorts a chance to press further.

Amid all of this, we have earnings season to contend with. Like we said in our last Stalking Stocks newsletter, the dismal action over the past several weeks as well as the low expectations for second quarter results could trigger some short-covering rallies. However, until the financials are able to put in a meaningful bottom, it’s going to be hard for this market to see any sustained action to the upside.

Regardless, longer-term investors who raised cash as the technical conditions began to deteriorate in May are in a good position to ride this out. There’s simply no reason right now to try and anticipate a turnaround. The pricing action will let us know when we can begin to put our capital to work once again.