Free Newsletter: Stalking Stocks with the Shark - Market Pulls Back On Low Volume - 8/18/08

Free Newsletter: Stalking Stocks with the Shark - Market Pulls Back On Low Volume - 8/18/08

Greetings Shark Investors:

Although the morning started off in a lackluster fashion, a lack of upside progress, pressure in the financials, and a mid-morning reversal in oil yielded what turned out to be a rather dismal trading session for the market on Monday. The news wires were especially quiet ahead of the opening bell, but early morning indications were for a mixed start to the day following a bit of weakness in overseas market. However, index futures moved off their overnight lows after European averages recovered and LOW posted better than expected quarterly results of $0.64 per share on $14.5 billion in revenues versus expectations of $0.56 on $14.13 billion. Guidance, meanwhile, was disappointing after management said that they expected to earn between $0.27 and $0.31 per share versus estimates of $0.33 in the third quarter.

Nevertheless, the market start open the day in positive territory, but sellers were waiting in the wings, hitting the opening strength hard and sending the averages into negative territory just moments after the bell. Although oil moved quickly to the downside as well, any initial buying was concentrated in energy and materials, while tech and consumer discretionary lagged. However, the biggest drag was the result of some heavy selling in the financials, which were being pressured by FNM and FRE on speculation that the Treasury Department may be forced to recapitalize both of those government sponsored entities.

Although the major indices were able to move off their early lows and drift sideways just under the unchanged mark for the rest of the morning, a fresh wave of selling kicked in just as we headed into the New York lunch hour. After stabilizing for a few moments, the downward pressure picked up once again, pushing the averages to losses of well over 1% mid-day. From that point on, the market continued to drift lower for the rest of the day, with the indices ending the session with losses of 1.5%, on average, on breadth that was worse than 2:1 to the negative.

Meanwhile, even though the extremely light volume – which can be attributed to the fact that many market participants are taking expected vacations ahead of the Labor Day holiday in two weeks – makes it difficult to read too much into this action, the most concerning aspect to Monday’s session is the technicals. Both the Dow and the S&P 500 gave up their respective 50 day moving averages, barely finding support at last week’s intraday lows. With this action, both indices are setting up to put in a short-term lower high and lower low. Moreover, they have also breached the ascending support trendlines which had formed, putting this nascent intermediate uptrend in danger of rolling over.

As we’ve been saying, the action of the past few weeks has been encouraging, but given the decreasing volume, lack of leadership and propensity for traders to quickly book profits after individual stocks broke out of promising technical set-ups has made for very choppy conditions. While lower oil and a stronger dollar have given investors the hope that some relief for a cash-strapped consumer may be in the cards, those developments have resulted more from concerns about a global slow-down rather than an improvement for the prospects of the domestic economy. That has, in turn, been evidenced in the continued outperformance in healthcare and staples, areas which attract money in a recessionary environment.

The bottom line here is that Monday’s action certainly demands our attention. While there have been some improvements, we need to proceed cautiously, pick our spots carefully, and make sure that we keep our stops tight. Buyers have moved to buy weakness before, but the big question is if the shorts will begin to press once again. One thing’s for sure, and that is now is not the time for big bets in either direction.