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February 1, 2006

Cool Heads Prevail

Google's earnings snafu did not affect today's market in the way yesterday's after hours trading suggested. Nasdaq 100 futures shed 22 points in the wake of Google's announcement, but the index held firm today and closed more or less flat. Yahoo shares, which had been down 5% yesterday evening, closed today up over 1%. Google itself ended the day down a mere $30 after being down $70 in yesterday's after market.

Those looking at Google as a potential catalyst for an inevitable market sell-off, including yours truly, must simply take the market in stride and listen to what it is telling us. A major problem with theme trading is that while contemplating scenarios in one's mind, time generally unfolds much more quickly than in real life. This time lag breeds doubt and frustration, but these destructive and very unprofitable emotions can be controlled by stepping back and objectively discerning market signals. Proper navigation of these signals turns doubt into confidence and also preserves capital for more effective deployment. Presently, the market is telling us that traders are still focusing more on positive news than on negative. Therefore, psychology is not conducive to the inflection point bears are seeking.

One story that could usher in enough concern to depress equities is a breakdown in long bonds. As the chart below shows, 20-year Treasury prices put in a trifecta of peaks last summer, following by an autumn slump. The latest rally, which began in November, would need to take out the summer highs to confirm good health for bond bulls. However, we can see from the trend line that the rally appears to have failed.

stock chart

From a technical standpoint, one would now expect a test of the longer-term trend line. Violation of that support could precipitate heavier selling, which at worst could culminate in crisis if it spurred foreign central banks to panic.

stock chart

We may be weeks or months away from such a test for the long bond, but its recent slide has done nothing if not add more weight to the housing sector's demise. The homeys certainly have more troubles to digest than bond yields, though. Home sale numbers are coming in weaker month after month, and the home builders find themselves suddenly without the luxury of pricing power. Prices have been discounted $50-100,000 in some areas! A 2-year chart of the Dow Jones Home Construction Index shows these stocks in the same technical predicament as bonds.

stock index chart

In other news, Research in Motion chalked up a win in its patent disputes with NTP as one of the central patents was struck down by the PTO today. Though RIMM popped 9% on the news, I am not ready to get aggressively short. Traders are transfixed by this battle and expect RIMM to shoot skyward once the ordeal is finally settled. The shares may very well go vertical, but once the dispute is laid to rest traders will have to begin focusing on stark realities named Microsoft, Nokia, and Palm, all of whom are selling competitive products. Mobile e-mail will transform into a commoditized product. Market share will be won via marketing acumen and pricing, and margins will plummet, taking RIMM shares down for the ride.

Disclosure: Long RIMM, YHOO Puts

 

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