Free Newsletter: Stalking Stocks with the Shark - Traders Pare Gains Into Long Weekend - 8/30/08

Free Newsletter: Stalking Stocks with the Shark - Traders Pare Gains Into Long Weekend - 8/30/08

Greetings Shark Investors:

After two decent days, the market gave back a chunk of those gains on Friday as market players booked some of their recent profits ahead of a long holiday weekend. After the major indices moved back towards overhead resistance on Thursday, indications were for a lower start to the day, with particular weakness in the tech sector following a poor earnings report and negative outlook from DELL. Specifically, even though they beat revenue estimates by $0.45 billion, earnings per share came in at $0.31 - much lower than the expected $0.36. DELL also warned of further cost cutting measures and a spreading global slowdown in tech spending.

Sentiment soured even further following the monthly report on personal income and spending, which showed that income fell by 0.7% (versus expectations of a 0.2% decline) while spending increased 0.2% (which was in line with consensus estimates). Meanwhile, the data confirmed worries over continuing inflationary pressures with a headline year-over-year reading of 4.5% and a core year-over-year reading of 2.4%, well ahead of the Fed’s stated comfort zone.

Still, even though the morning’s data – which in all reality met expectations – and news certainly wasn’t anything to get excited about, it did give the financial media something other than the obvious fact that we are dealing with a market that is being driven by participants with very short time-frames to blame the early weakness on.

As such, the averages opened the day to the downside, with the selling pressures picking up steam as the day developed. Of course, it’s interesting to note that, while the durable goods report on Wednesday and the upward revision to second quarter GDP on Thursday were used as explanations for the gains on those days, a much better than expected reading on the Chicago Purchasing Manager’s index about 30 minutes after the opening bell was completely ignored after it failed to bring in any buyers. Rather, the market continued to move lower for the first hour before settling into a tight trading range that persisted for the rest of the morning.

Things got a little dicey as we entered the New York lunch hour after a fresh wave of selling kicked in, sending the averages to what would turn out to be the worst levels of the session. However, that downdraft proved to be short-lived, as the market climbed right back to the same levels it spent the latter part of the morning in just as the afternoon got under way.

From that point on, the indices spent most of the rest of the day hovering around the same area, but began to lose steam once again in the final hour, finishing near the lows of the session. By the close, the indices lost, on average, 1.5%, on breadth that was just shy of 2:1 to the negative. Volume, meanwhile, actually tailed off into the close on the Nasdaq while it picked up late in the day on the NYSE. The net result was that volume was above the average over the past five days on both exchanges.

We’ve been saying all week long that the thin trading environment makes reading too much into the recent action not only difficult, but dangerous as well. Certainly, there were some pockets of strength under the surface, but the trading was quite “whippy” as traders obviously took quick gains where they had them. The good news, however, is that the averages were able to avoid more technical damage, finishing out the month in what look to be developing lateral channels.

We mentioned several days ago that some sideways action might result in the major indices building the sorts of bases they can build from once traders return to their desks and volume start picking back up.

That said, individual investors are best served in this environment by avoiding the prediction games that will surely be played as we enter the last stretch of the year. The bigger picture remains worrisome and there has yet to be any indication whatsoever that the problems we are facing – tight credit conditions, a weakening labor market, and depressed housing – are things of the past. Clear demand, strong price moves, obvious leadership, and increasing volume are the factors that will tell us conditions are starting to improve, and that just hasn’t happened yet.

There won’t be a shortage of commentary about how the worst is over and why we need to be buying stocks hand over fist. Instead of listening to opinions and predictions, we need to wait for hard evidence, and make sure we stick to a well-defined personal style. We’ll know when it’s time to start putting our capital to work in a more substantial manner.