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January 6, 2006

Big Moves

Whether a bull or a bear, one must admit the first week of 2006 has been quite spectacular. The broad market, as measured by the S&P 500, gained 3% in four trading days. Concentrated indices like the Nasdaq 100, which is large-cap and tech-heavy, bounced an amazing 5.4%. Many stocks that appeared to be on the brink of a break-down, including spec stocks Google, Yahoo, and Apple, all rocketed to new highs.

The magnitude of this week's move is all-the-more amazing considering the collapsing dollar, which set another new low from the November peak with another sharp decline today. Traders can now spend the weekend pondering how long this equity/dollar divergence can last and which will give first. This week's lesson is an old one: that the only thing that matters to equity traders is what is forefront in their minds right now, and right now they are focused on the prospects of a halt to hikes in the Fed Funds rate.

Yesterday I promised more volatility in metals prices, and today volatility was handed to us on a silver platter (pun fully intended). The white metal regained nearly all of its 4% loss from yesterday. I have been expecting metals to go vertical sometime soon. Of course, I have also been expecting stocks to fall off a cliff, but it hasn't occurred. Given the performance of the dollar, I will not back down from either expectation. It would be fitting that a vertical metals movement coincide with a stock market collapse, thereby handing the cyclical reins officially back to commodities for the first time in 25 years. But as always, we trade not so much by what we anticipate, but rather by what the market tells us, and right now it seems to be indicating more gains in the next few days.

Disclosure: Long YHOO Puts


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