Free Newsletter: Stalking Stocks with the Shark - A Real Sense of Fear Kicks In - 10/6/08

Free Newsletter: Stalking Stocks with the Shark - A Real Sense of Fear Kicks In - 10/6/08

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Greetings Shark Investors:

In our last Stalking Stocks evening review we said that last Friday’s ugly employment report and disappointing reaction to the passage of the bailout bill suggested that ordinary investors might being to wonder over the weekend if it might not be too late to sell. Apparently, the answer was “no,” as the market lost significant ground on Monday, despite a late day bounce into the close. Following last week’s break to fresh multi-year lows and sharp losses in overseas markets, indications were for a gap lower at the open as we kicked off the new week. Sentiment was downbeat from the get-go as credit conditions failed to ease in overnight trading, Germany moved to guarantee personal savings deposits and European governments failed to produce a consolidation package similar to the TARP.

As such, it was a sea of red once the market opened as investors fled to the safety of treasuries and gold, while the broader market started the day well into the red. After the opening bell, the indices spent the better part of the morning moving steadily lower, with the 10,000 level on the Dow providing only momentary support along the way. Although the market was able to recover a bit of their early losses after both the Dow and the S&P 500 fell under the lowest levels from 2004, the relentless selling pressure mounted again as we worked our way through the New York lunch hour and into the early afternoon.

The morning lows provided a bit of support mid-afternoon, but about two hours before the close that level finally failed as the averages moved to what would turn out to be the lows of the session with the Dow, Nasdaq and S&P 500 showing average losses of a whopping 8.67%. However, about an hour before the close, speculation that various central banks might announce a coordinated rate cut triggered a spurt of buying that lasted tight into the close, allowing the market to pare about half of its losses when all was said and done.

Still, despite the fact that we were able to close well off the lows of the session, there’s no getting around the fact that it was a very ugly day for the market. . The major indices finished with losses of 4.32% on average, closing just above the lowest levels in four years on the heaviest volume we’ve seen in over two weeks and breadth that showed about 13 losing stocks for every one that gained. We’ve been talking a lot recently about how, while the losses we’ve seen over the past several trading sessions are painful, the market is finally starting to do the necessary and messy work of pricing in the consequences from the collapse of the housing market.

The interesting thing, however, was the absolute silence of the serial bottom callers who, as the market fell under key support levels repeatedly over the past year, have urged investors to hurry up and buy lest they miss out on the resumption of the bull market they refused to admit was over. Despite the late bounce, there was a real sense of fear out there today and we finally saw some actual capitulation as investors sold down their positions regardless of the price they had to accept to do so. We’re not saying that we are on the cusp of a meaningful turn, but we’re starting to get to the point where the negativity is so pervasive that we can start thinking about our plans of attack when we do start seeing some real signs of strength.

In the immediate-term, however, the market has become quite oversold, increasing the changes that we will see some sort of reflexive move to the upside. Those with appropriate time-frames may find some quick trades to the upside, but with so many market players feeling trapped right now, the likelihood is that any action to the upside will be met with sellers looking for a way out.