Greetings Shark Investors:
Over the past couple of days, we’ve been saying that, while the major indices have failed to close below lateral support levels, they have only done so by the skin of their teeth, and that at some point, buyers would likely get fed up having not been rewarded for their efforts. That’s essentially what happened on Wednesday, as the major indices, after spending most of the day hovering right around important technical levels, fell to fresh five year lows in a very ugly final hour of trading.
Outside of news that C was shutting down one of its hedge funds which had lost over half of its value and that BBY’s credit rating had been lowered on consumer spending concerns, the news wires were relatively quiet as we headed towards the opening bell. However, following several days of very weak action, indications were for another poor start to the trading session. Also affecting sentiment ahead of the bell was news that the both the headline and core CPI readings (key measures of inflation on the consumer level) had fallen at a greater rate than expected. On the one hand, lower prices – especially after the recent spiked in food and energy – are welcomed news for cash-strapped consumers, but on the other, only serve to underline the speed with which economic conditions are deteriorating. Meanwhile, uncertainty surrounding the fate of U.S. automakers and fears about the economic fallout should one or more of those companies fail only added to a sense unease.
As such, the market opened the day in the red, but as has been the case recently, spent the first part of the trading session chopping around the flat-line as investors stuck around, waiting to see if buyers would finally move to get something going to the upside. Unfortunately for the bulls, they gave up earlier than usual, as the same sort of mid-morning deterioration that we’ve seen over the past few days kicked in a little early. The ensuing sell-off lasted for a bit more than an hour and took the market right back to short-term intraday support levels.
For the next couple of hours, the indices hovered around those key technical levels, but as the final hour got under way, instead of seeing a sharp recovery into the close, whatever buying interest there may have been simply vanished, and we sold off sharply straight into the close, finishing the day at the worst levels this market has seen in over five years and a mere stone’s throw away from the lows of the last bear market.
Although there was no specific catalyst to account for this breakdown, there were several factors at play – including concerns over corporate mortgage backed securities, a flight to safety in Treasuries, massive selling in corporate debt, continuing redemptions and margin calls, and hiccups in the overnight repo market – but while we could go on and on about how those things point to renewed recessionary worries, the only thing that individual investors really need to focus on at this point is that fact that prices continue to deteriorate.
Over the past several weeks, we have discussed how the market has been able to show signs of technical improvement, but while that’s been encouraging, we could never forget that the primary trend is lower and that we should think long and hard about putting our capital to work in an environment where the pricing action had yet to show any real signs of improvement. The only real lessons the market has taught over the past year is that strength should not be chased and the trend should not be fought.
The market taught us those lessons once again on Wednesday. Despite all of the recent talk about what great bargains stocks are and how this or that stock which is offering such a great dividend yield is a terrific value, the bulls have been completely unable to give any reason whatsoever as to why prices should be going up. Instead, traditional Wall Street would have us push our precious capital into stocks that are going down, regardless of how ridiculous that idea really sounds when you stop and think about it.
The bottom line is that there will be some outstanding treasures that we will eventually be able to pick from all of this rubble, but until we see some real proof that this market’s character has fundamentally changed, we will continue to preach caution and capital protection.
Let’s go to the charts.
The Nasdaq took a hit during today's trade on a average volume. Technology names were rocked, with GOOG and IBM leading to the downside. Recent lows were taken out today, and the index looks ready for a new leg lower.
The S&P 500 moved lower during today's trade on average volume. Financials were extremely weak today, with C, BAC and GS moving sharply lower. Technically, lows have been broken and price action is poor.
The Russell 2000 plunged lower during today's trade and broke through 2008 lows. The action was poor and small-caps continue to be destroyed. Capital preservation remains our focus.