July 1, 2008

US stocks to traded modestly higher into the close after a strong selloff this morning. The recovery can be attributed to short-covering, better economic data, a reversal in the financial sector and bargain-hunting. The morning trading had an eerie feeling of possible panic selling but it did not follow through to the close. We would have like to see more conviction this morning to the downside to call it a definite bottom. However, a meaningful reversal lower in oil over the coming weeks may make today’s low more significant.

The most interesting phenomena about today’s trading action, was the “counter” role of the financials. For as far as we can remember the late day selloffs in the financials have cause up days to quickly become down days. Today was exactly the opposite. This reversal was quite significant given that it is going to take a change in the sentiment of the financials for this market to put in a tradable rally. Keep an eye on these stocks given there is so much negative press on them as we speak.

Finally, we are not going to be convinced the selloff is over until the big runners (ex. POT, USO) finally get hammered. Be careful chasing a relief rally as at this stage. It is much more prudent and risk adverse to trade a dip after a solid bottom is placed than to try and catch the falling knife.

Here’s the NASDAQ and S&P Charts…