Free Newsletter: Stalking Stocks with the Shark - Bulls Build Further - 7/31/08

Free Newsletter: Stalking Stocks with the Shark - Bulls Build Further - 7/31/08

Greetings Shark Investors:

Despite an almost 4% rebound in oil prices and a rocky trading session, the major indices were able to move back towards recent highs on Wednesday following better than expected economic data and positive news from the financial sector. Indications were for a flat start to the day early in the morning as investors waited to see if stocks would be able to build on the previous day’s bullish session. However, both the index futures and the dollar moved sharply higher following the monthly ADP employment report which showed that the economy was able to create 9,000 new private sector jobs last month versus the expected decline of 60,000 economists had expected. While that number typically fails to accurately predict the jobs report from the Labor Department, such a wide divergence likely got traders thinking that we might be in store for a similar surprise on Friday.

As such, the market opened the day posting solid gains, but even though it was able to move further to the upside during the first hour of the day, news that a greater than expected drawdown in gasoline inventories reversed the early strength in the greenback and sent crude prices higher. While the energy sector rebounded strongly on that report, financials, industrials, tech, staples and consumer discretionary came off their early highs, and as a result, the averages began to lose steam, working their way back towards the flat line for the rest of the morning and into the New York lunch hour.

However, after bouncing around in mixed territory during the early part of the afternoon, news that MER, despite their massive write down and equity offering announcement Monday night, had decided not to cut their dividend triggered a broad-based turnaround about 110 minutes before the close. From that point on, just about every area of the market rallied straight into the bell to finish the day at highs on good volume and breadth that was about 3:2 to the positive.

Without a doubt, it was another strong day for the bulls. The averages have been able to recover from the sharp pullback at the end of last week and the beginning of this week to put in a higher low, but they are now sitting right at short-term lateral resistance. A higher high at this point may get the shorts nervous and the underinvested longs worried that they might miss out on another counter-trend move like we saw earlier this year. That said, we continue to be concerned that this market is clearly lacking any sort of leadership. While many hope that banks and brokers will be able to take on that role, the price at which MER sold their mortgage-related assets suggests that similar assets at other major financial institutions are holding on their books are still not properly valued.

Meanwhile, whatever strength there may be remains concentrated in the worst looking charts. A huge rebound in financials drove the first past of this bounce, and today, the attention has shifted to energy. The constant shifts from one area to another have left this market with very few decent chart set-ups, making it difficult to find opportunities to build more substantial positions. However, should this counter-trend move to be sustainable, then those set-ups will present themselves in time. All it takes is patience, and that’s one commodity we can never have enough of in a bear market.