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January 26, 2006

Bidding Returns

Salivating bears drearily watched stocks get bid up in this fourth day of what is turning out to be a rather dull week. The major indices gained just under 1% and, for a change, rallied into the close. Bears should not be too disheartened, though. Major indices are simply bouncing off moving averages and are likely to test those MAs again before deciding on a direction.

It also remains to be seen whether traders will be willing to hold stocks through the weekend, given recent market volatility, rising uncertainties in the Middle East, and a slipping bond market. Tomorrow's action should be considered closely, and if stocks are bid up again, it may be a sign that bulls are still firmly in control.

Metals were mixed today, with gold either marginally higher or marginally lower, depending on which month you consider. Silver, on the other hand, gained 1.5% to another new high. Yesterday I mentioned mitigating my Pan-American Silver trading position due to gold's non-confirmation of silver's break-out. I sure wish I had the full position now! PAAS tacked on 9% today, achieving the break-out I was hoping to capture while holding the full-sized position intraday yesterday. I cannot regret the decision to reduce the position, though. Not only is regret a frivolous, energy-consuming emotion, but a trader can only work with the information available at any given point in time and only within the parameters of a consistent risk-control system. Otherwise, emotions will quickly be converted into trading losses.

Okay, enough philosophy for the day.

The standouts on my screen today include Fannie Mae, which popped over 5% for no reason I could discern, and Best Buy, which screamed past $50 once again in a strong retail sector performance. I must admit the retailers have held up much longer than I anticipated, and when such things happen I retreat back into research mode in order to contemplate the story. My current view of the retail theme is that a dramatic slowing of home equity extraction will lead to a retraction of consumption, hence trouble for retail stocks. As we all know, such macro-level changes take several quarters to reverberate through the economy. However, the stock market has a tendency to forecast these shifts a couple quarters in advance.

Such a view may not be far off-base, but rather require a little more patience and trading skill. As the chart below shows, specialty retailers (the index includes BBY) peaked as a group at the end of July, and with the exception of November's tape painting, have not really been performing all that well. Technically, though, the group is in limbo right now, and we await a better read from the charts.

retail stock chart

Disclosure: Long PAAS; Long PAAS Calls, BBY Puts


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