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January 18, 2006

Anyone Surprised?

Equities were hit across the board today with the biggest losers, of course, coming from the tech sector. Today's action saw 12% lopped off the share prices of both Intel and Yahoo. Google fell 5% in commiseration with Yahoo, while the tech-heavy Nasdaq 100 Index fell just over 1%. Selling in the broader market was not too heavy as broader indices lost less than a half percent.

The reactions to Intel and Yahoo were quite negative, and although traders tried to contain the damage to these companies, I believe the downside surprises will be much more widespread. I am getting the feeling that I should have more shorts than I do right now. Apple and eBay report this evening. Disappointments from these two high-profile companies, especially Apple, which has been a market champion, could start a snowball effect to the downside.

Oil bounced around a moderate range today, up 1% at one point and down 1% later in the day. However, oil services stocks were a bit more volatile. The XLE was down 2.6% early in the day before recovering to close down only 1.2%. Equity traders appear antsy, like they don't quite believe the latest move in oil. I don't blame them. However, if oil were to maintain $65-70 for a short stretch, the doubters could become believers, and we could see a sudden and sharp rally in oil-related stocks. I'm not sure how tradable all these observations are right now… just some food for thought.

Oil stocks weren't the only commodity-related shares with exacerbated action. With metal prices off a little more than 2%, mining shares took a blow. Newmont dropped 2.9% and Pan-American Silver slipped 3.8%. Today's metals action emanated the feeling of a drove of traders itching to pull their collective triggers on some profit-taking. We suddenly find gold off $21 from the high it set yesterday and silver off 46c from its high, also set yesterday. As expected, we are seeing volatility increase, which fits my expectations for a spike in metals prices.

Volatility tends to ramp up just before a spike. However, bullish traders should be cautious because the spike could also come to the downside. A premise I have discussed here is that the next market swoon would coincide with a monster rally in commodities prices, thereby handing the throne of the investing back to real goods. If we are indeed seeing the start of something big to the downside in equities, and if my premise has any validity, then the odds would seem to favor the upside for metals.

Disclosure: Short INTC; Long INTC Puts, YHOO Puts, NEM Calls, PAAS Calls


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