Free Newsletter: Stalking Stocks with the Shark - Market Hits Fresh Multi-Year Lows - 9/17/08

Free Newsletter: Stalking Stocks with the Shark - Market Hits Fresh Multi-Year Lows - 9/17/08

Greetings Shark Investors:

The major indices posted solid losses, finishing at the lows of the day in what was another tumultuous trading session on Wednesday. Despite investors’ obvious enthusiasm over a possible government bailout of AIG late in the afternoon on the previous day, the announcement of an $85 billion loan to the troubled insurer failed to translate into a better mood early in the morning. Instead, global markets seemed more concerned of the possibility of further failures of large financial institutions and a credit market that has begun to freeze up once again. Despite the efforts of central banks around the world to pump liquidity into the financial system, the Wall Street Journal reported that, on Tuesday, “banks abruptly stopped lending to each other or charged exorbitantly high rates….”

As such, the averages started the day modestly lower, but unlike the previous two trading sessions when larger gaps to the downside presented dip buyers with an opportunity to try and catch a reflexive bounce, investors were completely uninterested in buying the opening weakness. While the market was able to hold above those initial lows for the first few minutes of the day, sellers didn’t wait long before going to work, pushing the averages sharply lower for the rest of the morning. With breadth approaching 9:1 to the negative and each major S&P sector posting steep losses – save healthcare, which was the only area to be down less than 1% in the early going – it was a sea of red out there as the day got under way. However, we didn’t have to look too far to find the greatest source of the pressure, as the financials led to the downside by more than 8% mid-morning.

By the time the New York lunch hour rolled around, the financials were down an eye-popping 12% while the averages were lower by 4%. For the next couple of hours, the market bounced around in a 1% trading range above those lows, but about 90 minutes before the end of the day, a wave of buying kicked in, taking just about the entire market well off their lows. Unfortunately for the bulls, however, that move proved to be a classic bear trap, because as we worked our way into the final hour, the market reversed to the downside, causing the indices to close at the worst levels of the session with losses, on average, of a whopping 4.57%. Meanwhile, volume was heavy on both exchanges and breadth was an astonishing 8:1 to the negative, but probably the most notable aspect to today’s session was that each of the major indices broke to fresh multi-year lows.

Without a doubt, this sort of action is quite dismal, but the good news is that, this market has started to make some real progress in purging the poison that is at the root of all the problems. We’ve been saying for months that a fast and tidy solution to the meltdown in the credit and housing markets was a pipe dream and that an end to this bear market would come only after absolutely nobody wanted anything to do with stocks.

We’ve got a long way to go, but there were some signs, such as a complete lack of dip buying interest and spikes in safer assets like gold and treasuries, that investors are taking steps in the right direction. That said, the bottoming process will not happen overnight, and it won’t occur without some more disappointing trading in between, and while today’s session had some very encouraging characteristics, we are a long ways away from being able to put our capital to work in a meaningful manner.