Free Newsletter: Stalking Stocks with the Shark - Financials Lead The Market Lower - 7/28/08

Free Newsletter: Stalking Stocks with the Shark - Financials Lead The Market Lower - 7/28/08

Greetings Shark Investors:

It was another day of losses for the market as persistent concerns regarding the credit market and lack of leadership pushed stocks lower across the board during Monday's trading session. Indications were for a lower start to the day as news that the FDIC moved to seize two more regional banks late last week and comments from Minneapolis Fed President about how credit conditions would likely continue to deteriorate weighed on sentiment. Better than expected earnings results from VZ and KFT helped to improve things a bit ahead of the bell, but it was not enough to ensure a positive start to the day.

Even though the market did open the day modestly to the downside, buyers showed a bit of life in the early going, taking the averages back towards the flat-line. However, the trading turned out to be choppy in the early going, with financials and energy in particular experiencing a handful of sudden swings. Unfortunately, that action failed to allow the market to gain any traction to the upside, and as a result, the tenor of the trading turned decidedly negative about an hour into the day. As such, the averages trended steadily lower for the rest of the morning and into the New York lunch hour.

As we worked our way into the afternoon, the selling pressures abated somewhat as the market hovered near the lows of the session for the next couple of hours, but a fresh wave of selling kicked in, ensuring a close at the lows of the day with average losses for the indices of 2% on breadth that was 11:4 to the negative and volume that was on par with what we've been seeing on Mondays over the past few weeks. Certainly, it was an ugly day all around. Only one of the Dow stocks was able to eke out a gain, while utilities and energy were the only two sectors to finish in the green.

Most notable, however, was the losses in the financial sector. The XLF fell 4.31% on the day, while the financial stocks on the Dow were responsible for about a third of the points that index lost. While much of the commentary throughout the day pinned the weakness in the financials on vague concerns, there was plenty of talk regarding the 12% drop in shares of MER and the sharp increase in the number of open options contracts on "no new news." Of course, it wasn't a real big stretch to assume that "somebody knew something", nor was it much of a surprise to see MER issue a press release after the close announcing plans to raise $8.5 billion in new capital and, as the Wall Street Journal describes it, "lance the boil" on $30 billion in mortgage assets.

While this is may eventually be seen as the sort of bold step by a major broker to come clean in regards to the bad debt on their books, the news, as well as the action we saw between the bells, only goes to reinforce the notion that we continue to have little understanding about how far and how deep the problems resulting from the housing and credit bubble will reach. We'll see how this plays out, but it also should serve as a pointed reminder that we need to vigorously resist the temptation to trust any action to the upside in the midst of a primary downtrend – no matter how tantalizing it may seem.