Free Newsletter: Stalking Stocks with the Shark - No Place To Hide - 7/24/08

Free Newsletter: Stalking Stocks with the Shark - No Place To Hide - 7/24/08

Greetings Shark Investors:

After bouncing mightily over the past week, stocks pulled back en masse on Thursday as buyers refused to step up to the plate and provide support during a wave of profit-taking. It was another mixed morning of earnings news as MMM and F missed expectations by a wide margin, and AMZN beat estimates, while QCOM offered in-line results and announced that they had settled patent litigation with NOK. Meanwhile, weekly jobless claims showed an increase of 34,000 to 406,000, which was well ahead of the 8,000 increase economists had expected. While the data concerning the labor market over the past several months has yet to show the type of weakness typically associated with a major economic downturn, it is obvious that the job picture is deteriorating.

Although the market opened the day just south of the flat-line, sellers hit the open hard, sending the averages sharply lower during the first thirty minutes of the day. Although the monthly existing home sales data also came in below estimates, the speed of the descent was at least able to slow a bit, but as the day wore on, the market kept sliding lower and lower with much of the selling being concentrated in industrials, tech, materials, and consumer discretionary. However, the worst action by far was seen in the financials, which led to the downside for the entire day, finally finishing the trading session lower by over 6%.

At the same time, we didn’t see the sort of rotation into energy names that many might have expected as investors shied away from the trades that had worked so well for the first half of the year on continued weakness in commodities in general and choppy action in crude. The net result was average losses for the major indices of 2.24% on breadth that was right at 3:1 to the negative and volume that, while lighter than the previous day, was still heavy.

While most of the day’s selling has been blamed on the disappointing economic data, the simple fact is that this market had come too far, too fast off its recent lows and was due for a pullback. A 31% move in the financials over the course of five days just isn’t sustainable without any sort of rest – especially when it was obvious that much of the bounce in the banks and brokers has been driven by heavy short-covering. As we’ve mentioned, a pullback there gives short-term holders a chance to book profits and strong hands the opportunity to accumulate shares. There was an obvious lack of support on Thursday, but the thing that we really need to watch for is some underlying buying interest in the days ahead.

Meanwhile, the big question at this point is if the indices will be able to put in a higher low or if another test of the recent lows is in the cards. Certainly, it’s been all but impossible to put substantial capital to work into this bounce, so investors who have kept their trades small and their time-frames short should be agile enough to avoid much damage if the action continues to deteriorate. The ball has been in bulls’ court and the bottom line here is that the they need to step up to the plate in the coming days.