Free Newsletter: Stalking Stocks with the Shark - A Promising Day Turns Ugly - 9/2/08

Free Newsletter: Stalking Stocks with the Shark - A Promising Day Turns Ugly - 9/2/08

Greetings Shark Investors:

What was looking to be a strong day for the market early Tuesday morning turned ugly as the major indices reversed hard between the bells despite a sharp drop-off in crude prices, further strength for the U.S. dollar, in-line economic data, and promising news for the financials. Indications were for a higher start to the day as oil pulled back sharply after Hurricane Gustav turned out to be much less of a threat to energy assets in the Gulf than had been feared and Korea Development Bank confirmed that it is in talks with LEH to buy up to a 25% stake in the struggling investment bank.

The futures continued to advance as we headed towards the opening bell, but even though the major indices did gap higher by more than 1% to start the day and built on those initial gains in the first few moments of trading, buyers were obviously hesitant to chase the stocks as the day got underway. In fact, the most notable aspect to the early trading was how quickly many of the initial technical breakouts were sold. While there were a number of promising set-ups we found over the weekend that attracted early buying, traders occupied themselves by flipping most of the stocks on our watchlists for quick gains.

About an hour into the day, the market suffered the first of several waves of selling that dominated the action for the remainder of the day. After that first slip lower, the averages were able to stabilize, but half way through the New York lunch hour, another bout of selling kicked in, which pared about half of the opening gains. Once again, the action leveled out, but the last, and most damaging downleg began about 150 minutes before the closing bell, sending the averages to what would turn out to be the lows of the day as the final hour got under way.

By the close, each of the indices lost 0.47%, on average, on increasing volume and breadth that was essentially flat. Certainly, the point losses weren’t that large and the indices were each to hold their respective 50 day moving averages, but the fact that investors were completely disinterested in buying any weakness as the intraday reversal unfolded is something that cannot be ignored.

Without a doubt, this is not what the bulls wanted to see after they returned from the vacations, but as the media scrambles for some reason to blame on the selling, one thing that has become apparent is the fact that lower commodity prices are not the panacea many were hoping for, as they are an indication of soft demand and a slowing global economy.

We’ll see if the bulls can turn the tide as the week develops. A complete lack of consistency has plagued this market for the past few months, so assuming that the action will continue to break down is not something anyone should be counting on. That said, a challenging and difficult market became even more so today, and that should be enough to remind individual investors that we are a long ways from being able to put money to work in a more substantial manner.