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April 7, 2006

Blood Red

Friday, April 7th was the type of day that lures us bears into the market. After a quick pop in the first 15 minutes of trading, equities soured and spent the rest of the day sinking. All major indices went out at their lows. Bonds also continued waning, pushing the 30-year Treasury above 5% and bringing the 10-year to the brink.

I write a lot on these pages about the return of Papa Bear, though I have done little about it... until today. The high-volume reversals put in by several indices and sector-based ETFs, along with Treasuries now dancing around 5%, large momentum divergences, and increasing public concern over inflation, spurred me to begin building more serious short positions. Mind you, timing is subjective. Today's action could simply be another great big bear trap, and if so, I'm in the trap, but only with one foot so far.

The ETFs that caught my attention were the S&P Financial SPDR, S&P Consumer Discretionary SPDR, and the iShares Russell 2000 Value Index Fund. All three are sectors that have lead the market from the 2003 lows (though the XLY lost its leadership role when it topped in early '05). I believe these areas will also lead the market lower and therefore are natural places to begin building shorts. The S&P 500 also fell sharply after touching a new multi-year high.

One may gaze at the charts and be struck that today's retreat doesn't look a heck of a lot different than many of the other recent peaks that have subsequently been eclipsed by renewed strength. As I said, timing is subjective, and today I subjected my portfolio to a few short positions. I may change my mind quickly if my expectations do not begin to pan out.

Intel edged to yet another new low. The shares are being treated like hot potatoes ahead of their earnings report (April 19) and have not participated in either of this year's SOX rallies, despite being a major component. AMD continues to grab market share, and pricing is becoming more cutthroat. It is hard to see how Intel escapes this quarter without disaster.

Research in Motion, as expected, disappointed investors yesterday evening, and the shares fell 5%. I am still reticent to build a short position on RIMM, but I suspect I will do it sometime before their next report.

Overall, there was nothing in today's action on which the bears could hang their collective hats, and now they have the whole weekend to fret about it. How we proceed in the early going on Monday should tell us a lot about what the market gods have in store for us.

Disclosure: Short, XLF, XLY, INTC; Long IWN, INTC, RIMM Puts


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