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November 3, 2005

All-In

Opinions about market direction throughout this year have been about as polar as I can remember. The markets have swung dramatically, and technical signals have been unreliable. In October, we observed a prevailing apprehension, if not expectation, that something nasty would happen to the downside. Bears, including myself, smelled blood, while bulls sat cautiously on the sidelines hoarding their cash and waiting for clearer skies. When the meltdown failed to materialize, all the sideline cash came storming in, chasing out the bears.

The prevailing attitude has quickly swung to the bull camp and its expectation of a year-end rally. History is on the bulls' side. The holiday season is typically strong for the market, and momentum now has an upside bias. As cautious as the bears need to be at this juncture, the bulls should also be wary of October's lesson. With both camps sharing upside expectations, traders may be all-in with their long bets just as they were short in October. meaning that there is no more buying power. The current rally could fizzle quickly. Nevertheless, I see little chance of a meltdown until after Ben Bernanke starts his new job. I mentioned several months ago that the bears may have to wait longer than they would like for the resumption of Papa Bear. These things tend to occur near psychology turning points, and Greenspan's retirement is certainly that.

Today's markets were as peculiar as ever. It seems ironic that the upside was lead by retail stocks like Best Buy, Target, and JC Penney a day after ABC and the Washington Post reported that consumer attitudes in the U.S. are continuing to worsen. Wal-Mart is worried enough to have already announced deep discounts coming for the holiday season. Energy prices, though off their highs, are still about 50% higher than a year ago. Credit card companies are imposing tougher minimum payment requirements across the board. The housing market's role as a cash machine is cooling. Then the headlines began the day with a strong report of same-store sales. Once again, our robust economy has solved its problems overnight.

Housing stocks hit a brick fascade today, turning quickly from the sharp rally of recent days. Reading the homeys is difficult right here. Are the big gainers like Centex and Beazer going to lead the others up in an longer upswing or were they just the subjects of harder short squeezes? Either way, the longer-term direction for these guys is down. I may start adding short positions on the big gainers and add more if the rally continues.

Disclosure: Short BZH; Long BBY Puts

 

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