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December 21, 2006

Cheaper by the Ounce

Stocks were generally weaker today after a new data point on the economy from the Philadelphia Federal Reserve district strengthened the case for a coming recession. As has been the case recently, tech stocks lead the way down. The NDX fell about 0.7% while the SPX lost less than a half percent. We can see in the following chart that the NDX met support right where it would be expected. If 1760 fails, we may see a quick retreat to 1700.

stock chart

The SPX is also looking weak:

stock chart

The antagonist of yesterday's show, Newmont Mining, gave an encore with a further 1.5% drop. The only solace I can take from this pullback in miners is that shares of Pan American Silver, which I would like to re-enter at some point, are also getting cheaper. After failing to conquer resistance at $26, PAAS has pulled back a couple bucks. Given the vertical run from $17.50 over a two-month period, a year-end retreat is probably quite healthy. Although I usually do not like setting price targets, my contemplation of the environment for silver over the next year leads me to believe that the next leg up in the bull market could see PAAS shares into the $45-50 range.

I have also been contemplating what the new year will bring, specifically the first week. The psychological setup seems to indicate that the biggest surprise would be a sharp sell-off. Bulls are looking for a replay of 2006, where the market ended weak in December and then took off. Most bears, however, though still expecting a first quarter decline, are calling for the fun to begin in mid-January or early February. Sounds to me like Mr. Market can take the most from both sides by plummeting on Day One.

Research in Motion reported results after the close today and missed their earnings target, though reported sales went through the roof. Year-over-year, revenue soared 49%. However, net income went up only 26%. Usually, strong sales growth is accompanied by even stronger earnings growth... the earnings figure has a smaller denominator due to overhead. The point here is the sales growth was fueled by lower margins, which is not a sign of health.

Tomorrow, there will be no post. Merry Christmas and Happy Holidays to everyone.

Disclosure: Long NEM, NEM Calls


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