Free Newsletter: Stalking Stocks with the Shark - Bouncing Oil Pressures Market - 8/13/08

Free Newsletter: Stalking Stocks with the Shark - Bouncing Oil Pressures Market - 8/13/08

Greetings Shark Investors:

Although it was looking like the bulls were going to be able to engineer an encouraging bounce following some broad weakness in the morning, the market sold off in the final hour to end Wednesday’s trading session in the red for the second day in a row. Following yesterday’s pullback and subsequent negative results in overseas markets, indications were for a slightly softer start to the day. However, a couple of poor earnings results weighed on sentiment as we headed towards the opening bell.

Specifically, both DE and M missed top and bottom-line results by posting earnings of $1.31 per share on $7.07 billion in revenues (versus expectations of $1.36 and $7.17 billion), and $0.17 per share on $5.72 billion in revenues (versus expectations of $0.19 on $5.75 billion), respectively. Meanwhile, June Retail Sales were somewhat disappointing, showing a headline reading of -0.1% and +0.4% when automobile sales were backed out, but failed to have much of an effect on the futures.

As such, the market opened well into negative territory, falling straight down for the first few minutes of the session. Although the averages stabilized somewhat afterwards, the selling began to pick up steam once again after the weekly crude inventory report from the Department of Energy was released. News that oil inventories fell by 316K barrels (verses expectations of a 300K build) and gasoline inventories dropped by 6.4 million barrels (versus expectations of a 2.15 million draw), sent the broader market to fresh session lows and began what would turn out to be a 3% bounce in oil.

Over the next few hours, crude continued to build on its initial spike following that report while the broader market kept falling lower. Although energy and materials were the main beneficiaries and ended up leading on the day, both financials and consumer discretionary were hit hard. However, as we worked our way into the afternoon, oil began to pull back off its highs, triggering a broad-based turnaround. As we approached the final hour, the averages were in mixed territory, and it was looking like the bulls were going to be able to get out of the day with a respectable close. Unfortunately, a fresh wave of selling kicked in as we headed towards the final bell, sending the market back into negative territory. By the end of the day, the indices lost, on average, 0.43%, on breadth that was slightly negative. Meanwhile, volume was light on the Nasdaq, which outperformed on relative strength in big-cap tech names, but higher than it was yesterday on the NYSE.

We mentioned yesterday that the real gut-check for this market would come if and when we saw a reflexive rally in oil, and while it looked like investors were willing to buy this morning’s weakness, the heavy selling into the close doesn’t do a whole lot to engender much confidence. For two days now, we’ve seen a general lack of conviction as buyers shy away from their recent bets in consumer discretionary, financials and industrials. That said, the major indices remain in decent shape from a technical perspective and have so far been able to remain within their burgeoning intermediate uptrends. Moreover, the relative outperformance in both the Nasdaq and the Russell 2000 is certainly a market positive.

At the same time, however, one of our biggest complaints recently remains a major factor. Outside of some strength in tech stocks, the market continues to favor defensive areas. All in all, we are lacking any sort of solid leadership, and that’s going to make it difficult for those who are hoping for a more substantive turnaround. We’ll see if the bulls can hold here, but it may be just a matter of time before the continuing problems in the credit, housing and labor market begin to weigh on the action once again.