Free Newsletter: Stalking Stocks with the Shark - Headline Numbers Hide Carnage - 8/4/08

Free Newsletter: Stalking Stocks with the Shark - Headline Numbers Hide Carnage - 8/4/08

A sharp drop in crude prices and better than expected economic data failed to inspire buyers as stocks continued their recent retreat during Monday’s trading session. Following the previous day’s poor action, losses in Asian markets and volatile trading in Europe, early indications were for a slightly lower start to the day. Even the Personal Income and Spending Data, which showed that income rose by 0.1% (versus expectations of a 0.3% decline) and spending increased by 0.8% (versus an estimated 0.5% rise), did little to improve sentiment ahead of the bell.

As such, the market opened the day in negative territory, but sellers were standing by, sending the averages sharply lower for the first 90 minutes to what would turn out to be the worst levels of the day. The early downdraft was broad-based, with much of the pressure concentrated in the financials and materials while the scant buying interest that was out there was concentrated in the more defensive sectors, healthcare and staples.

After that, the market was able to stabilize a bit for the next hour or so, but just as we were heading into the New York lunch hour, news that the tropical storm in the Gulf of Mexico would likely neither strengthen nor threaten energy assets sent crude prices nose-diving, which in turn shot the averages quickly back towards the unchanged mark. That news helped take the financials, industrials and consumer discretionary higher, but it also put additional pressure on energy and materials. Meanwhile, defensive names remained in the lead.

Unfortunately for the bulls, however, a drop to the lowest levels seen in over two months for crude failed to be the panacea many were hoping it would be, because after struggling, but failing, to reach into positive territory, the averages turned right back downward, giving up a large chunk of the ground it had just gained.

From that point on, the action remained choppy, but the leader/laggard relationship that had established itself remained firmly in place for the rest of the day. A spurt of buying in the late afternoon stoked hopes that the market might be able to close in the green for the first time since the middle of last week, but a fresh wave of selling that lasted right into the close sealed the deal on another poor day.

Certainly, the losses for the indices – 0.79% on average – were notable, but the headline numbers do little to convey the absolute carnage many of the year’s best performing areas saw. There’s been plenty of talk about how consumers and businesses alike have been pressured by record high energy prices, and the implication is that a pullback in crude would help alleviate some of that pain. However, $120 for oil is still pricey, especially when we remember that’s about double what it was towards the end of the last bull market. Furthermore, despite all of the hand-wringing about the evil-speculators and their nefarious plans to stick it to us by artificially inflating the price of crude, many are now starting to realize that dropping energy prices explicitly points to softening demand and a slowing global economy.

Still, regardless of the reasons, investors continue to find themselves facing a market that is still struggling and pricing action that leaves a lot to be desired. The major indices are once again looking precarious from a technical perspective. Short-term lateral support levels are fast approaching, and the bulls are going to need to step up here pretty soon. The FOMC interest rate decision on Tuesday might be the catalyst that will set the stage for another higher low, but without any leadership and a general lack of decent chart set-ups, the bulls are going to have their work cut out for them if they want to turn the tide.