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April 11, 2006

Equity, Anyone?

Looks like Wall Street has run out of black ink. Tapes were painted red once again as equities were panned, and major indices fell about 1%. The first wave of selling commenced with the opening bell and lasted about 45 minutes. Although brief, the damage was sharp and indices failed to bounce throughout the afternoon. With about two hours remaining in the session, bulls tried to instigate a rally, but their efforts failed, and we sunk to news lows before seeing a small bounce into the close. Overall, today's action felt about as detrimental to stocks as last Friday's reversal.

I received several e-mails commending me for picking the top on Friday. Although I appreciate the notes, we still don't know if Friday will actually prove to be this year's top. We have seen only two trading days more, and though today's action reinforces my conviction about having witnessed a turning point, the bulls have overcome too many adverse situations to be written off so quickly. To steeply paraphrase a famous Harvey Kietel line from Pulp Fiction, let's not all start patting each other's backs, just yet.

Interestingly, there was not a sector that particularly stood out in today's selling. Homeys, semiconductors, small caps, and transportation, among others, were all down between 0.7% - 1.1%. One of my favorite shorts, Building Materials Holding, did manage to stand out with a 4% loss. Research in Motion also continued slipping, down another 2.5% today and about 12% over the passed week. To answer burgeoning questions: no I have not begun to get aggressively short RIMM. If the shares go straight to perdition from here, I very well may miss it. Yes, I think RIMM is an $8 stock, but until I feel I have a handle on its action, I will not put my money at risk. When trades are opened recklessly, the trader is put at a disadvantage because of the emotions that come into play should the trade not behave favorably.

In the metals arena the action ended flat despite silver being up another 20c overnight. Miners were not spared, however, as the group fell around 1%. Pan American Silver managed to edge out a miniscule gain while Newmont fell in line with the group. I suspect the large miners will make a run at new highs sometime this year, which is why I have a small call option position on Newmont, but their short-term underperformance of metals makes me wary of a sharper pull-back should metals cool off for an interim. Therefore, I am waiting for clearer waters to get aggressively long.

Disclosure: Short BMHC; Long BMHC, RIMM Puts; Long NEM Calls


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