Free Newsletter: Stalking Stocks with the Shark - Still No Capitulation - 7/15/08

Free Newsletter: Stalking Stocks with the Shark - Still No Capitulation - 7/15/08

Greetings Shark Investors:

Volatility was the name of the game once again on Tuesday as the major indices were able to recover from an absolute drubbing in the morning to finish the day in mixed territory. Following the previous day’s dismal session, indications were for a significantly lower start to the day as concerns over the health of the U.S. financial sector sent global markets sharply lower in overnight trading. In addition to that pressure, market players also had plenty of economic and earnings data to contend with. About an hour before the open, index futures came off their worst levels of the early morning after JNJ delivered solid second quarter results and raised their guidance. Meanwhile, retail sales failed to impress after increasing 0.1% versus an expected 0.2%. However, both core PPI and the NY Empire State index came in better than expected at 0.2% and -4.9, respectively.

Despite the improvement ahead of the bell, stocks opened the day sharply lower, but after spending the first thirty minutes moving straight down to what would turn out to be the lows of the session, they began to turn around after Fed Chairman Bernanke told the Senate Banking Committee that the U.S. banking system was well-capitalized. The ensuing move to the upside accelerated after crude suddenly took a nose dive on no apparent catalyst. From that point, the averages marched steadily higher back towards the flat-line, finally reaching positive territory just as we entered the afternoon. For the next couple of hours, the market chopped around in a relatively narrow trading range, but just as we entered the final hour, a sudden wave of selling hit, sending just about the entire market sharply lower straight into the close.

By the end of the day, the indices lost, on average, 0.60% on breadth that was right at 2:1 to the negative. Once again, the results were certainly not as bad as the early action indicated it might be, but at the same time, the mid-morning rally negated what looked to be a day in which we would see the sort of capitulatory selling that would set this market up for a more tradable counter-trend move. Instead, investors are left to deal with action that continues to be driven by short-term traders and brief bounces to the upside which fail just as soon as they get under way. We are left to deal with quick drops and fast bounces which give those with shorter time-frame a change to book whatever gains they may have.

That said, given that absolutely none of the action to the upside has been able to stick for going on two months now, it’s completely understandable that market players would move aggressively to book gains as soon as they occur. The dismal action into the close simply highlights that.

Regardless, even if we don’t see some sort of capitulatory event, we do at least have some potential catalysts for action to the upside with earnings season getting under way. Like we have said, given how oversold this market is, we could very well see some short-covering rallies once the reports really start rolling in. However, the thing to keep in mind is that, if we do see this market begin to make a little progress off the lows, a lot of it will likely be driven by rebounds in some of the worst looking charts. We won’t be seeing real bullish set-ups for quite some time.