Free Newsletter: Stalking Stocks with the Shark - Broad-based Rally Spurs Market Higher - 8/5/08

Free Newsletter: Stalking Stocks with the Shark - Broad-based Rally Spurs Market Higher - 8/5/08

Greetings Shark Investors:

Following three straight days of losses, the major indices were able to rally strongly Tuesday on falling commodity prices, better than expected economic data and a Fed that failed to deliver any surprises. Although there is typically little movement ahead of FOMC interest rate decisions, indications were for a strong start to the day as oil dropped nearly 2% ahead of the bell as it became increasingly likely that Tropical Storm Edouard will not be threatening energy assets in the Gulf of Mexico.

As such the averages opened the day well into positive territory. Financials and consumer discretionary were the early leaders, and even though each of the major S&P sectors were in the green, weak crude kept energy and materials at the end of the line for the second day in a row. Although the market gave up a portion of its initial gains shortly after the bell, an unexpected increase in the ISM non-manufacturing index, which came in at 49.5 – a reading that, while indicative of contraction, was better than what economists had anticipated – sent the averages sharply higher.

Although it is typical for investors to do some positioning ahead of an FOMC interest rate decision, the market will usually enter a narrow trading range ahead of the news. However, that was far from the case today as the broad-based move higher, which began at the bell, continued straight though the morning and in to the early afternoon.

As was expected, the Fed left interest rates unchanged at 2%, but instead of having anything really new to say, they basically punted by acknowledging the problems the economy is currently facing, but saying that they expect inflationary pressures to moderate and for growth to resume at a more sustainable pace in the coming quarters. After some very typical whipsaws following the news, the market resumed its upward trend, moving higher straight into the close. By the end of the day, the indices finished with average gains of 2.87% on breadth that was right at 5:2 to the positive and decent volume.

Taken in isolation, a Fed statement that highlights a tight credit market, a continued contraction in housing, high energy prices, elevated inflation expectations and weak economic growth certainly wouldn’t lead anyone to expect such strength, but that’s exactly what we got. The thinking is that these issues and concerns are already so well known that the market was able to cheer a Fed that essentially stayed out of its own way.

Regardless of the reasons, the fact remains that the bulls were in complete control during the trading session. Each of the major S&P sectors closed higher with financials and consumer discretionary in the lead with gains of well over 4%. Even energy, which was the only sector to dip into the red mid-day, clawed its way back to finish up 0.76%. Meanwhile, one of the more interesting aspects to the day was breakouts in traditional “recessionary” plays such as WMT, MCD and JNJ. We’ve been pointing out a lot recently how the lack of any sort of leadership has been making it difficult for active investors to find any dominant themes to play, but if one is developing, it’s the movement of capital out of commodity related areas and into defensive groups.

Be that as it may, the bulls were able to step up to the plate and set us up for another higher low. However, short-term overhead resistance is looming again, and it remains to be seen if they have what it takes to move the averages past those levels this time around.