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June 16, 2006

A Breather

Today's equity action had all the feel of a consolidation to set up a continuation of the upswing that began late Wednesday. As planned, I kept my distance from the trading window and reflected upon recent action. The great debate among traders at this point is whether we just witnessed another market correction or woke up Papa Bear. You may surmise that I suspect the latter. This year's action has so far conformed well to the playbook, and I have yet to identify a strong reason to change the outlook.

In the news, China's central bank raised the reserve requirement for all banks in the country from 7.5% to 8%. Since the move is presumably aimed at cooling the Chinese economy, it had the effect of knocking the wind out of Asian currencies. How much this move will actually affect the Chinese economy and hence the prices of commodities is unknown because we don't really know how close to the line Chinese banks were keeping their reserves. Ultimately, news like this simply sets up buying opportunities for currency traders who want to sell the U.S. Dollar. Despite all the anti-dollar rhetoric floating around, this country still prints the world's reserve currency, and when things get tough, we will have, and will exercise, the power to print faster than everyone else.

As I write the third Friday of every month, not much can be read into market behavior on options expiration, so I won't try. I suspect some great trading opportunities will arise in coming weeks as this rally exhausts itself, and the action over the next few days should begin to give us an indication of how long exhaustion may take.

Disclosure: None


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