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March 21, 2006

Bernankied

After initially threatening us with the ugly stick, markets underwent a melt up into midday. Best I could gather, the strength was simply the result of some buy programs on the loose. A little after midday, buyers got caged up again, the markets brought back out the ugly stick, and equities got beat for three straight hours into the close. The net result was about a 1% loss for the Nasdaq and about three-quarters of a percent for the S&P 500.

I would venture to guess that the weakness was the manifestation of overbought conditions sparked into reversion by a revised outlook for interest rates. Traders had to digest a new PPI number, as well as last night's speech by SeƱor Bernanke. People who were expecting signals that the rate hike cycle is nearing completion were sorely disappointed. Bernanke played down the yield curve inversion (it's always different this time, right?) and also said low long-term rates were a sign that not enough risk is being priced into the market. I agree with this statement, but not only for bonds. Stocks, also, are currently priced with very little risk, and I believe both asset classes will suffer once such risk factors begin to materialize.

In any case, Bernanke's stance has been interpreted as meaning the rates hikes will continue, ergo no signal of a coming halt. The lack of such a signal should be no surprise to readers here. My stance has been that the Fed will talk tough to the very end. Their primary concern at the moment is defending the dollar. Therefore, they will give no slack to interest rates until their hand is forced by crisis.

Fearing a market reprisal to just such a scenario, I dumped my Newmont Mining and most of my NEM calls late last week with the expectation of picking the positions back up at cheaper prices. So far, those moves seem to have been wise. Unfortunately, I also lightened up on my silver contracts, yet silver has continued to streak ahead. It seems the only thing that will end the anticipatory rally to the silver ETF is the actual approval of the ETF. We could then see a sell-the-news pullback, which I would be more than happy to buy into.

Back to equities... major indices put in major reversals today. The S&P 500 bounced off the underside of its upper trend line while the NDX put in a huge bearish hammer. The market's dynamic duo of Apple and Google also got the hurt put on them, with Apple setting a new low for the year. All this happened on fairly hefty volume. I wouldn't be surprised to see indices move sharply lower from here to test lower support, though I haven't figured out how/if to play things at the moment. Although I'd like to be significantly more short than I am right now if we were to see a market break, my current positions would still make for nice gains.

Disclosure: Long NEM Calls; Short AAPL

 

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