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October 20, 2005


What fun! I have two days to cover at once, and they were both doozies. Yesterday's blast was very typical of bear market volatility. History shows that periods of sharp declines are littered with large rally days, often bigger than what we saw yesterday. However, reversal like we saw yesterday are also typical of initial moves off market bottoms. So the question for traders is: was yesterday's move the start of a new rally or a bear-market bounce. Unfortunately, the question is unanswerable for the time being. We have to wait and see. I did, however, lighten up on my bearish positions as a defensive move.

Today's decline was concentrated in the afternoon, as has been typical of most of the action lately. Despite the sharp decline, we did not erase all of yesterday's gains! This is an important point for bulls, and now we go into an options-expiration Friday with high tension. Add it all up and tomorrow's action could be bouncier than the last two days.

So what opportunities have the passed two days opened up? First, oil and oil stocks have been battered. No surprise to readers here. I've been expecting the $73 hurricane price to prove to be an intermediate-term top in black gold. Oil services companies have seen a spate of profit-taking this month, many of them off 15-25%. In the coming months, these stocks will prove to be the bargains of the decade. I believe that Phase II of the great energy bull market will start sometime next year, and will carry us into the mid $100 range on oil.

Pfizer was likewise battered today to the tune of 7% after it lowered earning guidance for next year. The drug sector has been no place to be for the passed 18 months, but I also believe this will soon change. I started blowing Pfizer's horn at the beginning of the year. After about a 20% rally, I backed off due to the ongoing problems with COX-2 inhibitors. However, at $22, PFE is trading at 12X earnings and is yielding 3.4%. It's pipeline is full of new drugs, and I believe most, if not all, of the bad news is built into the price. I am once again a shareholder. It's possible that there will be follow-thru to the downside after a negative reaction to news or that the shares will be dragged down further in an overall market decline. I will add to my position from time-to-time should that occur.

Despite today's afternoon slide, stocks like Best Buy and Intel managed to show strength. Both stocks are quite oversold, so I believe the strength is purely technical. I'll be watching BBY closely for an opportunity to get short again. As I've noted before, companies like BBY, DELL, CDWC, and AMZN will suffer greatly when the effects of the housing bust take hold in consumer land.

Disclosure: Long PFE; Long INTC, CDWC Puts; Short INTC, AMZN


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