Free Newsletter: Stalking Stocks with the Shark - Choppy Trades Yields Poor Results - 9/23/08

Free Newsletter: Stalking Stocks with the Shark - Choppy Trades Yields Poor Results - 9/23/08

Greetings Shark Investors:

Although the action certainly wasn’t as frenetic as it has been over the past several days, the major indices lost more ground on Tuesday in what turned out to be a rather choppy trading session. Outside of some downgrades for a handful of big banks, the news wires were relatively quiet as we headed towards the opening bell. However, early indications were for a somewhat lower start to the day as the market waited for Treasury Secretary Paulson, Fed Chairman Bernanke, SEC Chairman Cox, and OFHEO Director Lockhart to testify in front of the Senate Banking Committee regarding current conditions in the financial markets.

Despite the early softness, though, index futures improved as we headed towards the opening bell, prompting a positive start to the day. As trading got under way, the major indices were able to sport decent gains, with materials being the only major S&P sectors to show a loss. Recall on Monday that, with the dollar tanking and the October contract closing around $120 after hitting $130 during the day, many of the weak-dollar plays which acted so well earlier this year were attracting a lot of attention. However, with the dollar bouncing back and oil back down under $109 in the morning as the November contract started trading, it was not too surprising to see some quick reversals in areas such as metals, mining, agriculture and solar.

Despite the decent open however, the market spent the rest of the morning bouncing around between gains of about 1% and the unchanged mark, but as the morning wore on, each trip to the flat-line was followed by subsequently weaker and weaker bounces. While the action during the morning was by no means poor, many traders also took note of the fact that the reaction to what was being said in front of the Senate Banking Committee was far from euphoric, in turn suggesting that plenty of market players are skeptical that all of the government’s proposals, even if they may be absolutely necessary, won’t automatically guarantee a new uptrend.

Although there was no apparent catalyst, stocks abruptly headed south just after the New York lunch hour got under way, but after taking a quick trip to negative territory, stocks turned right back up, moving back towards the flat-line as the final bell approached. Unfortunately for the bulls, however, the market reversed course once again as the indices moved right back down to the worst levels of the day, closing with losses, on average, of 1.4%. Strange as it may sound, the magnitude of the day’s move is nowhere close to what we’ve become used to recently, but the market ended up closing out another trading session with an ugly close.

As frustrating as this dismal action is getting, however, the one thing that individual investors need to keep in mind is that these are the very steps that this market needs to take in order to finally start making progress towards an eventual low. It isn’t pretty, and it’s certainly painful for those who have been holding on to the hope for a quick end to all of this turmoil, but the simple fact is that all of the counter-trend bounces and bailout rallies we’ve seen over the past year have only prevented this market from pricing in the consequences of the meltdown in the housing and credit markets.

Normally, we’d say that the speed and severity of the recent losses has set this market up for a reflexive move to the upside, but as difficult as timing such moves is normally, it’s going to be even trickier with the SEC’s ban on shorting an ever-growing list of companies. Still, even though he rules may have been changed, the fact that we are in a bear market hasn’t, and until we see signs of real improvement, capital preservation needs to be our number one goal.