Free Newsletter: Stalking Stocks with the Shark - Market Bounces Modestly After Recent Weakness - 8/20/08

Free Newsletter: Stalking Stocks with the Shark - Market Bounces Modestly After Recent Weakness - 8/20/08

Greetings Shark Investors:

Although the major indices were able to rebound during Wednesday’s trading session, the path between the bells was anything but smooth and the sector leadership was anything but encouraging. We mentioned in our last Stalking Stocks evening newsletter that, despite the technical damage that the market had seen over the past few days, the averages were a bit extended to the downside and in a position to see some reflexive action in the opposite direction. As a result, indications were for a slightly higher start to the day, with sentiment being further buoyed by better than expected earnings results from HPQ, which reported earnings of $0.86 on $28.0 billion in revenues, versus expectations of $0.83 on $27.41, and guided their fiscal Q3 earnings to $1.01-.03, versus estimates of $1.00.

As such, the market began the day the day to the upside, but unfortunately for the bulls, sellers hit the modest opening strength hard, sending the averages straight into negative territory minutes after the opening bell. Following the poor start to the day, stocks bounced right back to the flat-line, but it wasn’t until the weekly crude inventory report from the Department of Energy was released that the move to the upside really began to gain some steam. This piece of data has really caused some big swings lately, and today’s report was no exception. Despite the fact that oil was in the process of adding to the $2 gain from the previous day, the inventory report was quite bearish for the commodity, showing a build of 9.4M barrels versus expectations of a 1M barrel build. The net result was a quick retreat into the red for Texas Tea, and a strong push higher for equities.

Once again, however, stocks were unable to hold on to their gains, because just after reaching what would turn out to be the highs of the session shortly after that report, they began to lose steam once again, declining steadily as we worked our way through the rest of the morning and into the early afternoon. The action for the next couple of hours was choppy, but essentially range-bound, with the market being supported on the one hand by the resource sectors which had remained strong despite the volatility in crude, but weighed down on the other by financials, consumer discretionary and industrials.

However, just as it was looking like that would be the story of the day, the bulls finally got on their horse in the final hour on no apparent catalyst. While each sector was able to move higher, most of the late move was concentrated in the financials which saw about a 3.5% swing in the later part of the session. By the close, each of the major indices was able to post advances, on average, of 0.47% on breadth that was just barely positive and volume that, while still light, was at the highest levels we’ve seen so far this week.

Obviously, the pricing action in crude continues to be a major factor in the market right now. Probably the most interesting aspect to the trading over the past few days is the fact that the areas which had shown the best relative strength earlier this year are once again in focus after taking it to the chin the last six weeks. Many of the stocks in the resource sector have started to form some interesting set-ups, while the areas which were supposed to lead us higher are once again starting to look shaky – especially the financials which have lost about half of their advance off the July lows.

The takeaway here is that if investors start looking to commodity related areas for leadership, that could mean trouble for a market that has already seen some technical damage recently. We’ll see how things develop from here, but we’ve been pointing out that the current low volume trading environment and precarious patterns in the senior indices means that the bulls will have their work cut out for them.