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June 15, 2006

Buying Pressure Released

Bulls finally got their day in the candy store as major equity indices soared between 2-3%. Of course, in this market it is hard to tell who was in the checkout line first: bulls with money to burn or bears trying to cover and protect profits. Either way, the result was impressive.

The behavior of the market in the wake of this rally will be quite important. If Papa Bear has, indeed, returned, the market gods will design this rally to convince bulls that they have been right all along in believing the last month of pain was simply a dip with which to get aggressive, while swaying bears to believe they have been duped by a false breakdown once again. At the point that marks maximum jubilation on the part of bulls and despair in the minds of bears, this market will reverse and show everyone its true nature.

As for handling this bounce, my only action today was to add a modicum of Intel puts to my holdings. I did not want to start reloading other positions simply because powerful bull-run days such as today rarely exist in isolation. Markets were very oversold, and sharp reversal days off extreme readings usually signal the beginning of the unwinding, not the end. Intel, though, has suffered so much duress this year, I thought it may not participate well in any follow-thru rally. If it does move higher, I'll build my positions further.

Metals... along with commodities in general... also bounced nicely today, demonstrating that current markets remain liquidity-driven. Real and financial assets are typically negatively-correlated, but both broad asset classes have moved nearly in unison for three years as central banks around the globe pumped cash into world banking systems. We are approaching a point where prices will be value-driven rather than liquidity-driven. That point will likely be marked by some sort of crisis that forces central banks to abandon their tough inflation talk and simply slash rates again. At that point, we will see stocks and commodities diverge in their traditional fashion, with stocks tanking in a bath of fear and commodities going through the roof.

I imagine we will see a bit of a pause tomorrow as markets digest today's moves and tomorrow's multiple option expirations. The plan for now is to become purely an observer until something clicks and tells me it is time for the another ride to the downside.

Disclosure: Short INTC, Long INTC Puts


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