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February 14, 2006

Down, No Up!

The market continued its meandering ways today with yet another sharp rally following a down day. The major indices were up 1% across the board, lead by retail stocks, which picked up 2% on strong sales data. The retail data was immediately interpreted as signifying that all the gloom and doomers are wrong about an impending implosion in consumption and therefore everything must be cheery with the economy after all.

In reality, today's rally simply signifies how fickle traders can be. The story on a consumption slowdown is rooted in housing. With a housing market peak occurring only two quarters ago, the effect on consumption has not yet had time to ripple through the economy. In fact, KB Homes reported this morning that order cancellations are on the rise and 2006 sales figures may have to be revised downward. Is this a nail in the coffin for housing? Not at all, but it is a another step toward the precipice. It is not even debatable any more whether the housing market is slowing, only how deep the slowdown will cut.

Nevertheless, the revelation from KB Home was ignored, not only in the general market, but in home builder shares, as well. After an early morning swoon, concerns were on the wane, and the homeys soared into the afternoon with the rest of the market. The morning's woes were an after thought as the group posted a 2% gain by close.

Whether today's rally unfolded in anticipation of ear candy from Bernanke, was spurred by favorable retail sales figures, or was simply a technical rebound is debatable, but at this point it is also irrelevant. What prudent traders should be trying to discern is the catalyst that will spark the next downside move because it will be big. Recent action has been full of reversals, betraying a large battle between bulls and bears, and I'm sitting on the sidelines until all the confusion gets hashed out.

Speaking of reversals... and there have been plenty of those recently... the U.S. Dollar Index put in a bearish hammer in today's action. It will be interesting to see if this behavior marks the top of the current rally. Metals traders may seem to think so. Though gold was up a mere one percent (a pittance compared to its recent action), silver soared 2.5%. Add to that the fact that 10-year Treasuries hit a new low for the year, and we may have a vote of no-confidence in the dollar. A crashing dollar may very well provide a catalyst for a crashing stock market, as it has done on several previous occasions.

Perhaps I'm getting a little ahead of myself. Such a scenario is purely speculative at this point, but it is a scenario worth considering. For now, my moves toward protective covers last Friday seem well-timed, as has my decision to stay out of oil for an interim. Crude futures fell another 3%, pushing the front month under $60 per barrel for the first time this year. I do not know when I will begin building my oil positions again. I imagine the current blow-out will end when attitudes that the peak oil story is over become prevalent. I'll just have to keep my eyes open.

Disclosure: None


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