Free Newsletter: Stalking Stocks with the Shark - Market Regains Some Ground - 9/30/2008

Free Newsletter: Stalking Stocks with the Shark - Market Regains Some Ground - 9/30/2008

Greetings Shark Investors:

After an average fall of over 8%, the major indices were able to recoup a large chunk of the ground it lost on as hopes grew that a revised bailout package would pass later in the week, extremely tight credit markets eased a tad, and some good old-fashioned reflexive buying kicked in during Tuesday’s trading session. Following the previous day’s absolute drubbing, overnight measures of credit conditions were showing signs of increased distress as the fed funds rate spiked to 7% and LIBOR jumped to 6.88%, but word that Congress was working on a second version of the Paulson package helped to push index futures higher as we headed towards the open.

As such, the major indices began the session trading sharply higher, but after working their way higher for the first hour or so, spent the next three hours chopping around near their early highs in a fairly tight trading range. However, as stocks spent the early part of the day climbing, signs that the recent flight to safety began to ease started to pop up as treasury prices fell and the TED spread pulled back from an early high of over 3.5%. Meanwhile, oil prices rebounded strongly despite strength in the U.S. dollar on the heels more signs of troubles in Europe after Dexia, a Belgian bank, had to be bailed out.

Despite that sideways action, the major indices began to hit fresh intraday highs as the afternoon got under way, spending the rest of the day making steady progress to the upside. By the close, the indices were sporting gains of 4.97%, on average, on breadth that was right at 2:1 to the positive and volume that, while lighter than Monday, was still better than what we’ve seen over the previous week.

As we were last week, we are left to deal with a market that is focused primarily on Washington and traders who are trying to position themselves in front of what they expect to be a rally if Congress can pass a bailout bill this time around. Certainly, a 5% gain on decent breadth and volume is nothing to scoff at, even if it came a day after the market lost almost double that the day before, but the fact remains that we are in a spot where charts and fundamentals don’t matter right now, and instead, we are held hostage by political wrangling, sound-bites, and headlines. The question, of course, is: how do we navigate our way though this mess? Right now, trading this market is all about understanding and gauging psychology. Emotions always rule the action, but they are playing a bigger role than normal at this juncture.

As such, it is increasingly important for individual investors to make sure that their time-frames are clearly defined. Those with the shortest of time-frames can certainly find quick trades in this extremely volatile environment, but given the news-driven nature of this market right now as well as the tenuous credit conditions, the risks are very high. Those looking to build longer-term positions would probably be better served right now by simply standing aside. The best case scenario right now is that we are starting to see the beginnings of a bottoming process, but even if that’s the case, it’ going to take a while for that to play out. These is certainly not a technical environment to trust, and we are far from having conditions that support more substantive buying.