Free Newsletter: Stalking Stocks with the Shark - Market Pares Recent Gains - 8/12/08

Free Newsletter: Stalking Stocks with the Shark - Market Pares Recent Gains - 8/12/08

Greetings Shark Investors:

After a couple of very strong days, the major indices pulled back on Tuesday as more bad news for the financials sector and profit-taking in some recent movers outweighed yet another pullback in commodities and further strength in the U.S. dollar. Indications were for a lower start to the day following news the previous evening that Moody's had downgraded the long-term debt rating of MS and WB said that their had adjusted their second quarter loss downward due to additional expenses related to their sale of auction-rate securities.

Meanwhile, the Financial Times reported overnight that JPM took yet another $1.5 billion in write-downs due to volatile credit conditions, while Oppenheimer joined Ladenburg Thalmann in reducing Q3 estimates for GS. Deutsche Bank also downgrade GS to hold from buy. Finally, UBS was in the spotlight after reporting a much larger than expected second quarter loss, which included $5.1 billion in mortgage-related securities.

Although news that Russian President Dimitry Medvedev said that he had ordered a halt to the military offensive against Georgia helped take oil off its pre-market highs and improve sentiment ahead of the bell, it wasn't enough to ensure a positive open.

As such, the market began the day well into the red with financials, industrials and consumer discretionary leading to the downside. Although the averages were able to stabilize at the early lows, the downside pressure accelerated about an hour into the day after oil began to pare its early losses. However, the market was able to come off its early lows as oil reversed lower once again, making its way into mixed territory as we headed into the New York lunch hour.

For the next few hours, the averages continued to trade in a relative narrow range with modest losses, but about 90 minutes before the close, a fresh wave of selling kicked in, sending them to what would turn out to be the lows of the day just before the closing bell. Although the market was able to recover a bit in the final few minutes, the indices ended the day with losses of 0.92%, on average, with financials leading to the downside with a loss of 4.71%. Consumer discretionary, which has been showing some relative strength lately, was also a laggard, pulling back by 1.37%.

Meanwhile, probably the most notable aspect of Tuesday's trading session, despite the continuing drop in commodities and gains for the greenback, was the lack of enthusiasm investors showed in pushing many of the stocks that have acted so well over the past few days higher. Although volume was on pace to be a bit heavier than it had been, on average, over the past several days, the pace cooled considerably as we headed towards the close and the broader market began to lose steam. If you haven't already, be sure to check out our free volume charting tool we recently added.

Regardless, the indices continue to be in decent shape for a technical perspective. The key will be the degree to which buyers buy any weakness should we continue to pull back. However, the real test will come when commodities, which have become extremely extended to the downside, experience a reflexive rally. The way in which investors react to such a bounce will give us better insight into whether or not we're dealing with a more sustainable counter-trend move.