Free Newsletter: Stalking Stocks with the Shark - Decent Underlying Action Despite Losses - 7/21/08

Free Newsletter: Stalking Stocks with the Shark - Decent Underlying Action Despite Losses - 7/21/08

Greetings Shark Investors:

The market once again danced to the tune of oil and financials on Monday in what turned out to be one of the quietest trading sessions we’ve seen in a while. Early morning indications were for a lower start to the day after news that Tropical Storm Dolly could potentially threaten energy assets in the Gulf of Mexico. However, index futures made their way back into positive territory on news that Roche Holdings, a European drug company, was seeking to acquire the rest of the shares of DNA that they didn’t already own. Sentiment was goosed further after BAC reported earnings that, while down 44% on a year-over-year basis, were well ahead of analyst expectations.

As such, the market opened the day in positive territory with most of the sectors trading higher at the bell. However, after a quick pop, the averages began what would turn out to be a morning-long trend lower as just about every area of the market, save energy and materials, started to roll over. By mid-morning, the averages were hovering above the unchanged mark, but fell sharply to the lows of the session after slipping into negative territory.

Although the market was able to move modestly off its lows as we worked our way through the New York lunch hour and into the afternoon, a sudden and sharp spike past $131 in crude sent the averages right back down. A small spurt of buying ahead of the final bell took us off the afternoon lows, and by the end of the day, the indices finished with losses of 0.14%, on average.

Still, despite the modest losses, volume was light, breadth finished right at 3:2 to the positive, small-caps outperformed and the financials were able to hold on to its recent gains once again. All in all, this is the exact sort of action that we should look for as the market digests last week’s huge move. That said, the most concerning aspect of the action over the past few days is the underperformance in the tech sector which has come on the heels of a string of disappointing earnings reports from key companies such as MSFT, AMD and GOOG. Given that tech accounts for nearly 20% of the S&P 500, it’s going to be difficult for a sustainable counter-trend move to develop with that area acting as a weight.

Regardless, some of the best action over the past several days has been in those stocks which have the absolute worst charts while the vast majority of stocks are a long ways from having the kind of set-ups which support longer-term position building. Should this nascent bounce develop further, then those set-ups will come. In the meantime, however, individual investors would be best served by sticking with a disciplined approach and not chasing stocks that have been bouncing towards overhead resistance levels.