Don’t Jump Headfirst into this Rough Market

Markets have had a negative bias in recent sessions. The DOW has had three triple-digit down days in the last five sessions, including a 180-point sell-off on Monday. The reality is that, despite the recent rally where the DOW bounced back from trading below 11,000, market risk remains high.

The financial services sector continues to be a sore spot. Lehman Brothers Holdings, Inc. (NYSE/LEH) looks like it will report a large third-quarter loss, reminding us that financial services stocks continue to be an area to avoid at this time. These stocks should not be considered dividend plays, because the risk of capital loss is major, as shown by the downward spiral in these stocks.

In addition to the risk in the financial services sector, the housing sector remains in turmoil. Key home building supplies company Lowe’s Companies, Inc. (NYSE/LOW) just reported a weak second quarter and announced an earnings shortfall for its third quarter. This cannot be good and points to continued weakness in both the housing and renovation markets.

Stocks are also selling off after the release of soft retail sales that showed a decline of 0.1% for July, the first drop since a 0.5% decline in February. The news was not a surprise given the recent weak same-store sales numbers reported by retailers. The concern now is that the government’s massive $168-billion economic stimulus program is failing to drive consumers to buy. The impact on economic growth going forward will be tested and this will place additional pressure on stocks.

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A major reason for the recent rally in stocks was related to the corresponding decline in oil, but you must be careful — despite the 20% reversal from the peak, oil prices remain relatively high, and will continue to impact spending and corporate profits.

At the end of the day, do not jump headfirst into the market, as the downside risk remains relatively high.