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August 21, 2006

Another Sleeper

Depending on where one looks, today's session could be interpreted as either a moderate consolidation or the beginning of a new downswing. The S&P 500 sank a paltry five points, whereas the Nasdaq 100 shed one percent, with most of its weakness coming from semiconductors, which got lopped for more than 2%. Housing-related issues also came under serious pressure with home builders down about 2.5%, and related sectors like mortgage companies... see Countrywide and New Century... slipping heavily.

Further testament to the effects of the housing slowdown came from Lowe's, which saw its shares 4% lower on a disappointing earnings forecast. It was very telling that Lowe's CEO backed up the lowered forecast saying, "Near-term pressures on the U.S. consumer have led to a more cautious outlook for the balance of the year." We'll probably be hearing a lot more of those types of statements into the October earnings period.

Precious metals put on a show for the bulls on the heels of weekend speculation that China will allow its currency to further devalue as a mechanism for slowing their torrid growth. Silver gained 35c and gold rose over $13, sparking multi-percent rallies in Pan American Silver and Newmont Mining. While the long-run case for a metals bull market certainly includes China-related factors, today's action appeared to be more reactionary than fundamental. Perhaps I'm misreading something, but for now I stand behind my belief that we will see one more bout of serious downside action before metals take off again.

Overall, the first session of the week seemed a bit tepid. For the most part, traders are sitting around twiddling their thumbs, awaiting direction. Bears are certainly gun shy and bulls seem to have run out of steam, at least temporarily. Perhaps their enthusiasm was tempered by the action in commodities and the dollar. At some point the dollar's weakness will cause smart money to flee dollar-based assets, but we don't seem to have quite reached that tipping point.

Disclosure: Long NEM Calls; Short PAAS, NEM Puts


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