Traders in U.S. stocks got a much-needed break as markets closed for the July the 4th weekend at 1 p.m. on Thursday. At this time, those trading the long side continue to face difficulties and bearish market and investor sentiment. The buying last Thursday on the DOW was driven by an oversold condition in stocks. The reality is that the bias continues to be focused on the downside.

On the energy side, oil prices continued to rise, as supported by bullish technical signals. The basis August light sweet crude on the NYMEX jumped to a record $145.85 in European trading last Thursday. We continue to view the high oil and gasoline costs as a major risk for the economy and stocks.

It is clear that investors are increasingly nervous given the condition of the economy and surging oil and gasoline prices, It will be interesting to see if travel during the past holiday weekend declined. In my view, it has not been a surprise to watch the recent drop in stocks. The 15% decline in the blue-chip DOW has been somewhat of a surprise.

Over the next several weeks, all eyes will focus on the second- quarter earnings reports. Analysts expect the results to be flat and this could drag into the third quarter, unless the investment climate improves. I believe the current market risk remains high and this will cap any sustainable upside moves. Unless oil and gasoline prices fall significantly, and the housing market picks up and reverses its current negative trend, I really find it difficult to imagine stocks trending higher.

The key now is capital preservation and avoiding any high-risk trades that could reduce your asset base. I would also begin to maintain a list of stocks that interest you and get set to buy once the market sentiment improves. The fact is there is a lot of cash on the sidelines.