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November 10, 2005

Bull Pen

The bulls showed us today who's still in control of this market: the bulls. An early morning slump reversed just before noon, and we went straight up from there. The major indices all closed with nearly 1% gains. The bulls pulled off this feat in the face of the record monthly trade deficit figure released this morning: a whopping $66B price tag. Both the dollar and the long bond ignored the trade deficit omens by rallying today. Maybe traders are all ecstatic that the deficit wasn't $70B.

It still seems that the only thing that matters in the current environment is the dollar. The recent breakout in the dollar index is holding, so I see no impetus for the bears to break the upward momentum at this juncture. The rally is likely to continue at least through the end of this month.

If the bulls want to keep buying, I'll sell 'em what they want. I bought more Intel puts into the strength today and may consider adding to my short when my model produces a sell signal. This morning Intel announced a stock buyback program and raised their dividend. The news provided some fuel for today's move, but mostly the stock is still working off a very oversold position from the end of last month.

Speaking of oversold positions, Research in Motion continues to have a high oversold reading in my model. Today's huge move will burn off a chunk of that reading, but RIMM bears may have to be a little more patient before they see pay dirt. RIMM is also a perfect example why position sizing is so important. Although RIMM seems to be facing the same fate as Palm did a few years ago, shorters face the prospect of a surprise settlement in the lawsuit with NTP. If Mr. Market interprets such a settlement as less damaging than anticipated, RIMM could pop 20% or more in a day. One would not want to have too large a position while facing that risk. If such a scenario were to unfold, though, it would present the perfect opportunity to short or add to a short, in my opinion.

Disclosure: Short INTC, RIMM; Long INTC, RIMM Puts


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