Free Newsletter: Stalking Stocks with the Shark - Market Enhoys Antother Financial-Led Bounce - 7/22/08

Free Newsletter: Stalking Stocks with the Shark - Market Enhoys Antother Financial-Led Bounce - 7/22/08

Greetings Shark Investors:

The major indices were able to regain another big chunk of ground on Tuesday as another pullback in crude and a late spurt of buying helped to turn a rough open on the heels of several disappointing earnings reports into another day of strong action. Indications were for a much lower start to the day following poor earnings results from AAPL, TXN, WB and AXP. Tech names have seen some very poor reports recently, and with AAPL and TXN lowering guidance and the latter missing both top and bottom line estimates, the pressure continued for that sector. Meanwhile, financials have seen a remarkable recovery off lows, and the news from WB and AXP threatened to put that rally to the test.

As such, the market opened the day well into the red, but the early downdraft didn’t last long after news that Tropical Storm Dolly would miss energy assets in the Gulf of Mexico triggered a sharp and sudden pullback in crude. While that put pressure on both energy and materials, it did spark a reversal in the broader market which sent the averages back towards the unchanged mark. Most notably, however, was the fact that the financials were able to shrug off the morning’s earning’s news and work their way into positive territory.

The action settled down as we headed into the New York lunch hour as the major indices spent the next few hours trading in a narrow range, and as we worked our way through the afternoon, it was looking like we were headed for a mixed close. That said, given the rough open, such a finish to the day would have been pretty darn good. However, a fresh wave of buying kicked in about 90 minutes before the close which sent just about the entire market, but especially financials, sharply higher straight into the close. By the end of the day, the indices finished with gains of, on average, 1.2% on good volume and breadth that was about 2:1 to the positive.

Although much of the early recovery was the result of the drop-off in oil and there’s still plenty of folks who suspect that most of the recent improvement is the result of the short selling restrictions on a handful of large financial companies, there’s no getting around the fact that it was a strong day for the bulls. The ability of this market to rally in the face of unexpectedly bad earnings news is quite encouraging, but at the same time, the indices have moved straight up onto overhead resistance. That has put the ball firmly into the bulls’ court, and they need to follow through in the coming days.

Of course, individual investors need to be considering to what extent they want to try and ride along with these recent moves. As we have pointed out, most of the recent strength has been concentrated in areas with the weakest charts while the types of set-ups that would encourage more aggressive position building are few and far between. While we are seeing some short-term trading opportunities, it is imperative that we keep our eyes on the bigger picture, which is decidedly negative.

The bottom line is that, while we’ve possibly seen the beginnings of some better action to the upside, we need to remain highly skeptical about the sustainability of any move that is counter to the primary trend. The simple fact is that we are in a bear market, and while that means we will ultimately find tremendous buying opportunities once it’s over, it can inflict tremendous damage on our capital if we follow the advice of gurus and so-called pros who say we need to be buying all the way down. There are obviously trades to be had right now, but with technical resistance looming nearby, it’s difficult at best to think that we are going to see easy sailing from here, However, if this sort of action continues and the averages are able to continues to improve technically, then we’ll start to see the sort of set-up that invite real buying.