Free Newsletter: Stalking Stocks with the Shark - Heavy Selling Inflicts Techncial Damage - 09/04/08

Free Newsletter: Stalking Stocks with the Shark - Heavy Selling Inflicts Techncial Damage - 09/04/08

Greetings Shark Investors:

Although the major indices came into Thursday’s trading session at the lower end of their respective lateral channels, investors failed to step up to the plate at any point between the bells as the market fell to its worst levels since late July. Unlike what we have seen recently, there was plenty of news on the wires as we headed towards the opening bell. Early in the morning, chain store sales began hitting the wires, and even though there were a few standouts, such as BKE and ARO, on the whole, the news wasn’t too encouraging. Retailers such as LTD, SKS, JWN, GPS, TJX and PLCE all missed estimates, but WMT, which saw ex-fuel comps rise by 3.0% versus expectations of a 1.5% increase, did help to improve sentiment somewhat.

However, whatever slight improvement their numbers did provide was erased about an hour before the bell when the ADP employment report showed a loss of 33,000 jobs (versus expectations of 30,000) and the weekly jobless claims number increased by 15,000 to 444,000 (versus an expected reading of 420,000). Meanwhile, while second quarter productivity beat estimates by increasing 4.3%, the longer-term benefits of higher productivity outweighed the short-term negatives. Specifically, firms may be able to avoid hiring new employees since they are able to get more out of what they already have.

The net result was a lower open for the market, but even though the averages held their ground for the first 30 minutes of the day, the first, and most violent, downdraft sent them to early losses of between 1.5% and 2.0% after oil plunged to what would turn out to be the lows of the day. We’ve been talking a lot about how higher commodity prices had weighed on the broader market for some time, but that the precipitous decline in crude recently has investors worried that the unfolding global economic slowdown may prove to be more severe than had been anticipated. That sentiment was clearly evident again today as ETFs which track emerging markets got hammered, sectors like tech and industrials, which have large international exposure, led to the downside for most of the day, the greenback strengthened further against foreign currencies, and money flowed into treasuries.

The rest of the sesion saw a steady drip lower, and there’s just no getting around the fact that an average decline of 3.01% for the indices on breadth that was worse than 4:1 to the negative and increasing volume makes for a very ugly day. Still, we can’t help but shake our heads in befuddlement at the financial media that questions the “validity” of the selling and can’t help but asking their guests what they are buying. There will never be a shortage of so-called market experts who will tell us that every big sell-off is just another great opportunity to buy stocks that are “on sale”.

For the past several weeks, we’ve been cautioning that the low volume environment and the fact that traders have been obviously working with very short time-frames meant that there would likely be little underlying support should a bout of heavy selling kick in, and that’s exactly what we saw today. Although the averages had been trending sideways in a lateral channel for the past month, the channel has been busted, and that’s something that must be respected. However, what so many folks seem to fail to grasp is the idea that we, as individual investors, aren’t bound by the same constraints as the huge money managers who are paraded across the T.V. screens. We have the ability to stay flexible and react to events as they unfold.

The other thing we need to consider is that the multi-day drop this market has seen over the past five days has increased the chances that we will see some sort of oversold bounce here soon, but even though the bottom-callers will breathlessly boast that the lows from July were the lows, the greatest likelihood is that any strength will be used as an opportunity to sell.