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March 14, 2006


Equities accomplished today what they tried and failed to do yesterday: put in a solid rally from oversold conditions. With the exception of a brief pause in the second hour of trading, stocks more or less went straight up, lead by techies and home builders. A few stocks I have been short in the past, and intend to short again, caught healthy bids. These include: Apple, Building Materials Holding, Research in Motion, and Centex, among others.

The massive gains by the major indices are no doubt leaving some short sellers shaking their heads. The resilience of equities in the face of surging commodity prices, geopolitical turmoil, and global trade imbalances has been startling and has lead many writers to point to manipulation. While I have no doubt that manipulation occurs in individual stocks, I don't believe there is manipulation on a market-wide scale. Such efforts are infeasible over long periods of time. I believe that the market is simply putting in an extended top. Events tend to unfold in markets over much longer timeframes than our imaginations can fathom. Combine this market attribute with bouts of impatience, and you can see where a lot of traders get themselves in trouble.

While frustrating, today's rally should not have come as too much of a surprise to bear traders. Looking at the SPX chart below, we see that the moving average has provided pretty good support, with the exception of the April and October slumps last year. At any point, a rebound from the MA to the upper trend line has good chances of occurring. Note, however, that even with this rally to a new 2006 high, the RSI is still declining, indicating waning enthusiasm for each new high. At some point this divergence will take its toll. Shorter term oscillators show the SPX very overbought, so I would be surprised to see the index conquer the upper trend line with this run.

stock chart

Another point of interest is the performance of Intel, which in the face of a monster rally in tech... the NDX was up 1.7%... managed only a 3c gain. I wonder what happens to the stock when the market starts falling...

Disclosure: Short INTC; Long INTC Puts


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