Free Newsletter: Stalking Stocks with the Shark - Market Gives Back Gains - 8/25/08

Free Newsletter: Stalking Stocks with the Shark - Market Gives Back Gains - 8/25/08

Greetings Shark Investors:

The market kicked off the new week on a sour note on Monday as a round of broad-based selling wiped out all of last Friday’s gains, and more. Indications were for a somewhat soft start to the day early in the morning as worries over the state of the financial sector continued to percolate after word surfaced that South Korean regulators had warned Korea Development Bank to take a “cautious approach” in response to the speculation that they might be interested in acquiring LEH. Meanwhile, sentiment was further dampened by news that the International Monetary Fund had reduced its forecasts for global growth for the rest of this year an next to 3.9% from 4.1%, further reinforcing the notion that the recent pullback in commodities and the resource sectors have more to do with concerns over soft demand rather than the popping of some speculative bubble. Still, while most of the early focus was on the financials, the index futures lost considerable steam as we headed towards the bell, indicating a bout of broad selling at the open.

As expected, the indices opened the day sharply lower and continued to lose ground as the morning got under way. Buyers, meanwhile, failed to respond favorably to a better than expected headline reading on the July existing home sales, which showed a 3.1% month-over-month increase versus the 1.1% increase economists had expected. The lackluster reaction was likely due to the fact that, despite July’s rise, the inventory of unsold homes also moved higher while the median sales price decreased.

After drifting steadily lower all morning, a fresh wave of selling kicked in just as we entered the New York lunch hour on no apparent catalyst, sending the averages to what would turn out to be the lows of the session in a matter of minutes. By this time, whatever buying interest there might have been early in the day was all but gone as energy, the only major S&P sector to trade in the green all day, fell into the red. From that point on, the indices spent the remainder of the day chopping around near the worst levels of the session, finally closing with average losses of 2% on bearish breadth that showed seven losing stocks for every one that gained. In fact, just about the only good thing we can say about Monday’s action is that, once again, volume was incredibly light on both exchanges, indicating that the institutional money still is out enjoying their last vacation of the summer.

We’ve been saying that these low volume days make it extremely dangerous to try and read too much into the action, but at the same time, the major indices are looking awfully precarious from a technical perspective. We pointed out early last week that the failure of the rising wedge patterns we had been pointing out over the past few weeks indicated that market players would likely be shifting to a more defensive posture once again, and judging from today’s action, that process looks to be playing out. We’ll see what the rest of the day holds and how the week develops from here, but the averages are getting close to testing short-term lateral support again, and are in danger of putting in another lower low.

The bottom line is that, as we’ve been saying, individual investors are best served in this environment by assuming that any sustained action to the upside will ultimately fail. We haven’t completely rolled over yet, and one never know what the next day will bring, but for the past ten months, we’ve been reminded again and again that we are indeed in a bear market, and there has yet to be any indication that it has suddenly come to an end. At some point it will, but until then, we need to make sure we remain focused on capital protection and short time-frames.