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August 4, 2005

Banana Peel

Threats from al Qaeda, steaming oil prices, and overbought conditions haven't done much to roil markets recently, but put them all together on one day and it's like throwing a banana peel on a freshly waxed floor. Experienced traders know that news items are not important in the short term. What is important is how the markets react to them. When markets fall in response to the same 'ol news that usually bounces off harmlessly, it tells us that Mr. Market was looking for an excuse to fall. The market gods, comprised of our collective psyche, are always itching to move one way or the other and will latch on to whatever news is present, twist its interpretation to suit its preference, and get on with moving the way it wants.

The magnitude of today's move tells me that the market was very overbought (big surprise). Whether we're going much. much lower now or just getting a pause in this year's monster stock rally (walk, don't run, because you've probably missed most of the action) won't be known until we see further signals. For example, despite today's 1.3% decline in the Nasdaq Composite, Google managed to eke out a gain. I would be much more convinced of coming despair if this bellwether spec stock started breaking down.

On days like this, I look at individual movers to seek strength and weakness. Indeed, some of my favorite shorts fell more sharply than the general market, which is very encouraging. Research in Motion, F5 Networks, and Dell all slipped 1.7%. Intel shed 2.3% and Texas Instruments dropped 2%. The homeys fell around 1.5%, except for Centex, which managed to hold par today.

I've got a close eye on Oracle, Toll Brothers, and Wal-Mart, all of which are sneaking toward sell/short points in my technical indicators. I'll keep readers posted should any signal get triggered.

Disclosure: Short RIMM, FFIV, CTX, INTC; Long DELL, INTC, TXN Puts


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