Free Newsletter: Stalking Stocks with the Shark - Bulls Given Free Reign - 8/28/08

Free Newsletter: Stalking Stocks with the Shark - Bulls Given Free Reign - 8/28/08

Greetings Shark Investors:

The major indices were able to post solid, broad-based gains during Thursday’s trading session following though on the previous day’s advances. Despite an early move to back over $120 in oil, early indications were for a flat start to the day, but sentiment improved markedly as we headed towards the opening bell following a better than expected upward revision to second quarter GDP.

Specifically, the new reading on growth showed that the economy expanded by 3.3% instead of the preliminary reading of 1.9%, driven mostly by a 13.2% increase in exports and a 1.7% rise in personal consumption. Also helping the mood early on was strength in the financials following news that MBI had announced an agreement to reinsure $184 billion in U.S. public finance bonds already insured by FGIC.

As such, the market opened the day by gapping strongly higher, basing at its initial highs for the first hour or so before making a series of advances as crude fell sharply off its opening highs, moving back towards the $115 mark as the New York lunch hour approached. From that point on, both the S&P 500 and the Nasdaq continues to creep higher while the Dow spent the remainder of the day right near the highs of the session.

By the close, the indices were able to post impressive gains of 1.5%, on average. Although financials, with an advance of almost 4%, was the clear winner on the day, industrials and consumer discretionary weren’t far behind, moving higher by well more than 2%, while energy was the only major S&P sector to close in the red. Breadth, meanwhile, was quite bullish at over 3:1 to the positive, another indication that the buying during the day was broad-based.

Of course, a thin pre-holiday trading environment didn’t hurt either. We’ve been saying all week long that the low-volume trading sessions ahead of holidays tend to exaggerate moves in either direction, and that was certainly the case today as the bears simply got out of the way and allowed the bulls free reign. That said, the averages were able to improve from a technical perspective, closing above the two short-term lower highs we saw over the past two weeks and approaching lateral resistance from earlier this month.

That said, we’ve also been saying all week long that the low volume also makes moves in either direction difficult to trust. We’ll see if the bulls can continue to move this market higher once traders return to their desks next week and volume starts coming back into this market, but in the meantime, individual investors will be best served by keeping a few things in mind. As we’ve seen so many times over the past 10 months, anticipating the end to this primary downtrend has been a recipe for pain. Respecting the dominant trend and assuming that it will persist – oftentimes longer than seems reasonable – is always the best approach no matter which way the market is moving.

Above all, however, we need to make sure that we don’t start getting caught up in the hope that we have clear skies from here. A market turn will come, and that can happen at any time. However, instead of trying to predict when that will be, we need to react to it. The market will tell us when we’ve had meaningful shift, and that will be characterized by obvious demand, strong leadership, increasing volume and prices that are surging higher.

We saw a bit of that today, but making sure we keep our trades small and our time-frames short continues to be the name of the game.