Free Newsletter: Stalking Stocks with the Shark - Market Beast Takeths Away - 9/9/08

Free Newsletter: Stalking Stocks with the Shark - Market Beast Takeths Away - 9/9/08

Greetings Shark Investors:

Just one day after the serial bottom-callers where jumping with joy, saying that the government bailout of FNM and FRE had put a bottom in this market, investors headed for the exits in droves, pushing the major indices right back to the levels we saw at the close last Friday. Following the previous day’s solid gains, indications were for a higher start to Tuesday’s trading session early in the morning. However, sentiment soured as we headed towards the bell, prompting a somewhat soft start open.

Despite that, investors stepped up to the plate, buying the initial weakness and pushing the indices modestly higher as the day got under way. Moreover, the market essentially ignored some disappointing economic data. Although expectations were for a slight dip in pending home sales for July following last month’s surprising 5.8% surge, the actual drop was more than double what had been expected at -3.2%. Meanwhile, the July wholesale inventories also missed estimates, rising by 1.4%. Interpreting inventory builds is always tricky as it could either mean that businesses are increasing goods for sale in anticipation of higher demand or that actual sales are soft. Unfortunately, in these difficult economic conditions, the latter is probably more likely than the former.

While that news was met with indifference, whatever action to the upside there was as the day got underway proved to be short-lived, as a the first of what would turn out to be many wave of selling kicked in, sending the averages well into negative territory. Although the downward pressure abated an hour later and the bulls did a respectable job of pushing back after a couple of tests of the worst levels of the morning, they were eventually punished for their efforts early in the afternoon.

As soon as those lows were breached, the market spent the rest of the afternoon moving steadily downward as each of the major S&P sectors fell solidly into the red. However, financial stocks were the hardest hit as LEH was in the process of shedding a little less than half of its market value, while an almost 4% drop in oil prompted massive selling in the energy sector. Unfortunately for the bulls, the afternoon downdraft accelerated into the close, with the indices finishing at the lows of the session with losses of 2.83%, on average.

Without a doubt, it was a very ugly trading session. Breadth was extremely bearish at 5.4:1 to the negative on volume that accelerated straight into the close. We mentioned in our last Stalking Stocks evening review that, while many were busy declaring an end to this bear market, individual investors were better off by keeping their cool and waiting to see what would happen once the initial excitement passed. Well, we didn’t have to wait to long for that to happen, and all once again got a reminder of why it is so important to not let blind hope guide our investment decisions.

The good news is that those who have been waiting patiently for this market to come to them rather than trying to be fully invested at an absolute bottom are in a good position to capitalize when market conditions do improve. We saw some real despair between the bells on Tuesday, and that sort of absolute frustration will likely be the only thing that will allow this market to eventually put in a meaningful bottom.