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February 22, 2006

Bull Flood

After bluffing a weak opening, the market spent the entire day rallying as the bulls showed us who is still boss. In a mirror image of recent performances, tech stocks took charge of the rally. The Nasdaq Composite gained about one percent and the NDX was up about one and a quarter percent. Financial stocks also did very well in light of higher bond prices. U.S Treasuries have put in an impressive rally over the last week, with the 10-year note dropping back to 4.5%. I have my doubts about the fortitude of this rally in financials and am searching for a low-risk entry point to put a short on either TLT or XLF.

An interesting note in today's action is Intel's continued slump. In the absence of any important news and in the face of today's powerful rally, the wholesale dumping of INTC shares continued, and the stock shed another 2%. I frequently glance at Dell's slide in late summer and early fall 2005 as a model of how Intel could behave. Despite appearing oversold for nearly three months (Aug - Oct), Dell slid sharply over the entire span. I'm not saying that Intel will slide for exactly three months or even behave identically to Dell, but rather that the behavior of both stocks exemplify what I call a reality re-alignment. Technical indicators, for the most part, don't apply during such periods. Dell's slide was finally halted by a high-volume capitulation day. If such a day were to occur for Intel, I would use it to reduce, if not temporarily eliminate, my short positions.

Despite the impressive performance by the bulls today, major indices are still contained within their upper trend lines. A couple more days like today, though, and the bulls may throw a blowout party. Given declining the momentum into the present top, I would be surprised to see an upside breakout, but I have seen such surprises before, so I am still twiddling my thumbs, waiting for clearer signals to get aggressively short.

Disclosure: Short INTC; Long INTC Puts


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