Free Newsletter: Stalking Stocks with the Shark Market Takes Major Techncial Damage 9/15/08

Free Newsletter: Stalking Stocks with the Shark Market Takes Major Techncial Damage 9/15/08

Greetings Shark Investors:

We’re sure everyone is well aware of what a tumultuous day it was for the market on Monday. Although market players ended last week hopeful that a white knight would step up to the plate and acquire LEH over the weekend, unfortunately, no one was willing to touch the storied, but troubled, investment bank without the promise of a government backing, and as a result, they were forced to announce that they would file for bankruptcy before the open. Also affecting the already sour mood in the morning was news that MER had agreed to sell itself to BAC, and that AIG was trying desperately to raise capital in order to avert a credit rating downgrade and subsequent failure.

As such, the market started the day by posting steep declines of between 2.5% and 3%. However, the winning trade each time we’ve seen similar gaps to the downside at the open has been to buy the initial weakness, and that exactly what happened almost immediately after the bell as investors bet that the a similar bounce would form. As the morning began to take shape, each of the major S&P sectors were able to move sharply off their opening levels, but given the fact that oil was trading well below the century mark, the early buying was most pronounced in the consumer related areas.

Unfortunately, however, whatever early buying interest that there may have been proved to be short-lived. Instead of moving to build more substantial positions and do some real bargain hunting, traders began to book whatever quick profits they might have had, and in the process, the averages began to give back much if the ground it had been able to make up.

As we worked our way thought the late morning and into the New York lunch hour, the market bounced around above the lows of the session, but began to lose steam as the afternoon got under way after Treasury Secretary Paulson’s press conference. Sentiment seemed to be pressured further following news that the Fed had declined to lend AIG $40 billion dollars to shore up their capital position. While news later in the day that a consortium of banks led by GS and JPM might put together the loan initially encouraged Wall Street, the downside pressure accelerated once again after word got out that AIG would need as much as $75 billion.

After steadily declining for the better part of the afternoon and breaking below the morning lows along the way, by the close, each of the indices lost 4.24%, on average, breadth was almost 10:1 to the negative (it was worse than 16:1 to the negative on the NYSE), and volume, which had been running relatively light early on, picked up quite a bit into the end of the day. Meanwhile, both the Dow and the S&P 500 hit fresh lows for the year, while the Nasdaq was able to hold above its March low by 10 points, give or take.

With the amount of technical damage we saw today, it would be an understatement to say that it was an ugly day for the market. That said, we have been arguing for quite some time that the uncertain environment, lack of buyable charts, and conditions which have been consistent with what we would expect to see in the throes of a bear market suggested clearly that individual investors should be extremely defensive.

The good news is that this is the exact sort of action, as difficult as it is, which will eventually allow this market to put in a real bottom. We’ve said for months that an end to this bear market would only come after the cycle of hope and disappointment played out several times, and today’s losses may help to discourage those who have been so eager to declare that the worst is over to allow hope to guide their investment decisions.

The bottom line is that Monday’s session is a perfect example of why individual investors should always respect the direction of the primary trend and ruthlessly protect their capital when that trend is down. Looking forward, we have GS reporting earnings in the morning and a FOMC interest rate decision in the afternoon. Good news from Goldman and a possible rate cut from the Fed could trigger a reflexive rally, but until this market proves otherwise, we need to continue assuming that any action to the upside will ultimately fail.