Free Newsletter: Stalking Stocks with the Shark - Consequences Begin To Kick In - 9/22/08

Free Newsletter: Stalking Stocks with the Shark - Consequences Begin To Kick In - 9/22/08

Greetings Shark Investors:

Although volume died down considerably, the action between the bells was as crazy as ever on Monday as the major indices kicked off the new week by giving back the lion’s share of Friday’s gains. Following the previous two days’ surge, the news wires were once again filled with developments for investors to consider early in the morning. First was an announcement that the last two major Wall Street investment banks, GS and MS, had applied to convert themselves into commercial bank holding companies, and that the Treasury had been talking about expanding its plans to buy mortgage-related debt to include other impaired collateralized debt obligations. Also affecting sentiment early on was news that the SEC had added another 50 names to its list of banned shorts. But, probably the most noteworthy aspect to the action ahead of the bell was an absolute drubbing for the U.S. dollar as concerns began to mount over how the government would pay for all its proposed bailouts.

As such, the market opened the day well into negative territory. We mentioned in out last Stalking Stocks evening review, that while the government’s efforts to shore up investor confidence and prevent a developing run on money market funds may have staved off a dire financial crisis, their actions would likely carry some unintended consequences. Markets that are under pressure will often receive support on the way down by shorts who buy into weakness. So, as the day got under way and financials were at the receiving end of most of the early selling pressure, it is highly likely that the downward pressure mounted as there were simply no short sellers to book their profits.

Meanwhile, the weakness in the greenback also triggered huge price spikes in oil, gold and other commodities, which in turn put pressure on consumer discretionary and technology stocks. The net result was a market that spent the entire morning moving steadily lower. While the averages were able to stabilize as the afternoon got under way and pare a small portion of their losses, a fresh wave of selling kicked in as the final hour got under way, causing the indices to close at the lows of the session with losses, on average, of 3.75%. Meanwhile, even though volume was the lightest since the end of August, the selling was broad-based as each of the major S&P sectors finished well into the red on breadth that was 22:6 to the negative.

We also mentioned previously that massive bailout plans and emergency trading restrictions are by no means signs of strength, and that our job at this point as individual investors is to determine how we are going to deal with all of this turmoil. Certainly, the spike in the weak-dollar plays which dominated the action earlier this year is providing short-term traders some quick opportunities, but have we really reached a point where it’s safe to start putting our capital to work in a substantive manner?

We’ve been steadfast in arguing that the market will tell us when it’s time to put our precious capital back to work. Clear demand, big volume, strong, broad-based price surges and technical improvement are signs of a healthy market, and we have yet to see any of those things. Remember, there’s no hard and fast rules about having to participate in a market that is in a clear state of flux, and in fact, the best thing individual investors might consider is the merit of standing aside while all of this mess sorts itself out.