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August 9, 2005

Certainty Rally

The biggest enemy of a bull is uncertainty, so when the market gets exactly what it expects, it goes into rally mode. The beloved Federal Reserve Board fed the market its usual brew this afternoon and sent stock prices surging. Major market indices gained about 0.75% across the board, and individual sectors, particularly housing, posted big gains.

The homeys have been of particular interest recently as the charts appear to be breaking down and stories of inventory build trickle in from across the nation. I don't see any particular reason why housing should rally in the face of higher short-term rates. It's possible today is just a technical bounce after two bloody days for the sector, and we won't really know what today's action means for a few more trading days.

Only a couple other points of action caught my attention today. First, Texas Instruments rose a buck with no apparent news driving the stock. I'm watching this stock for a favorable shorting opportunity, but I don't want to step in front of a speeding train. I want to see weakness in the issue before I bet on a slump. The company has been doing very well on the wings of its cell phone chips. But the stock is priced for continued double-digit growth while forecasts for cell phone unit sales growth are under 10% for the next few years. Furthermore, cell phone companies are looking for low-priced units in order to expand target markets. At some point TXN's margins will be pressured, providing a double-whammy to it's bottom line (PE deflation plus margin contraction). Whenever it looks like Wall Street figures this out, I'll throw my weight on the pile.

The other point today may be of minor significance, but caught my eye, nonetheless. Intel staged an early rally (up 2%) only to finish up less than a half percent. My technical indicators put out a sell signal on Intel yesterday, so to see a failed rally today adds some credence to the signal. Let's see how it unfolds.

Disclosure: Short INTC, Long INTC, TXN Puts


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