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June 12, 2006

Déjá vu All Over Again

Today's action took a familiar form: a very brief and largely negligible bluff to the upside upon the open, followed by a slow, grinding decline through most of the session, leading to a late-day capitulation. Every attempt at some upside traction was firmly rejected, and equities exited the day at new lows for the current slump.

As readers know, I've been anxious about the potential for a vicious counter rally. I gave this idea the focus of my attention over the weekend, approaching it from both the technical analysis and psychological viewpoints. I know technical analysis is supposed to reflect the underlying psychology, but it does not always do so. Therefore, it is useful to try to judge the psychological environment independently, get a feel for which has more credibility, and then weigh things accordingly. As a matter of practice, I almost always weigh my psychological viewpoint heavily and use technicals as a warning tool.

Anyway, back to my weekend thoughts... Given that the current environment of selling was triggered by the death of the one-and-done theme with regard to the action of the FOMC, it seems logical that the first serious counter rally would be mounted once the Fed eases up on their hawkish tones. The question of when this will happen is not easily answered. Certainly, the Fed could cry uncle at any time and throw the market a bone. If they did so anytime soon, though, the action could backfire via loss of credibility. Who wants a Fed that changes their song every month?

Therefore, I am of the opinion that bulls will get no serious relief before this month's FOMC meeting. Unless, the market is in total collapse by that time, I would also expect the Fed to be unscrupulous in its anti-inflation banter through the meeting. Sometime between the June and August meetings... but probably no later than the August meeting... the markets will play Bernanke's cards for him and force him into a more dovish stance.

Given this line of thought and watching the quickly failing rally attempt this morning, I decided that waiting on a counter rally to add to my Intel puts would be a bad idea. I bought a block of puts early in the session and then pleasantly observed Intel shares dip below $17 for the first time since 2003. In fact, "dive" would be a more appropriate choice of verbs. An investor's 8-year return on this stock is now exactly zero before inflation.

Silver took another thump on the head today with a nearly 2% drop, while gold fell less than 1%. Mining shares felt the pain, sporting 2-5% losses. Obviously, my put sales on Pan American and Newmont appear ill-informed at this juncture. However, the idea was to capture implied volatility as part of the premium, and volatility comes along with a decreased probability of catching an inflection point. Bottom line is that the immediate losses in these positions don't bother me… at least not yet.

Disclosure: Short INTC; Long INTC Puts; Long PAAS; Short PAAS, NEM Puts


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