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February 8, 2006

Are the Bulls for Real?

In typical fashion, the market caught strong bids across the board after a series of high-profile companies, including Cisco Systems, reported earnings and raised guidance for 2006. The strong disappointments posed by Intel, Google, Yahoo, and Apple are being ignored, at least for today.

The buying was steady throughout the day, and all the major indices went out on their highs, up about 1%. If today truly marks an inflection point for more upside movement, the markets will have to prove it soon. Both the S&P 500 and Nasdaq Composite are sitting right on their moving averages and just below their 2006 uptrend lines, both of which could pose significant resistance to a weak rally.

stock chart

stock chart

A favorite long play of mine, Pfizer, gained momentum, rising 6% on reports that it will spin off its over-the-counter product division. I first highlighted PFE over a year ago, stating that all the fears (at that time) over Celebrex were overblown and that it was a well-run company and good long-term hold. It took a year for all the negative psychology to run it course, and the stock appears to have finally broken out of its bear market. In fact, pharmaceuticals are one of the long picks in my 2006 outlook, though I have yet to build positions.

Metals prices were flat today, but yesterday's beating is still reverberating throughout the press. Many bulls are fretting that a recession and rising rates will kill the bull market. First of all, recession and rising rates are not likely to occur simultaneously, especially with Ben Bernanke at the controls of our nation's printing presses. Second, it is the nature of markets, bull or bear, to produce strong counter-rallies in order to shake out weak players. As long as one is not so leveraged that a downswing in prices will cause a wipeout, holding long-term positions is still a high-probability prospect.

Housing stocks put in a strong reversal today, prompting me to trim back my short position. The reversal could be a head fake or it could mean I'll be able to sell again at a higher price. Time will tell. For the record, I closed a short in PHM. The BMHC short I've discussed recently is still firm.

Disclosure: Short BMHC


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