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September 9, 2005

Eternal Optimism

Hope sprung upon equities again today as the major indices gained between a half and three-quarters percent. The optimism seems to be fueled by expectations that the Fed will cease its rate hikes. However, I came across an interesting chart today that shows that rate cuts might not be the best medicine for bulls:

Chart: S&P vs. Fed Funds Rate

Traders were also particularly keen on buying housing stocks, pushing them up 3% after an analyst at a non-major securities firm upgraded Meritage Homes and Pulte Homes. The analyst stated that the Las Vegas housing market "has reached equilibrium and is back to normal." He also noted that home builders had to slash prices up to $100,000 per home in order to reach this so-called equilibrium, but the price discounts didn't seem to bother traders much. Apparently, the worry over Hovnanian's earnings disappointment is now ancient history. After all, that was more than 48 hours ago. Today's celebration more than erased the losses suffered by the collective group after HOV's release.

AMD continued its phenomenal run. The stock has now gained 17% in the last 7 trading sessions, despite being in a severely overbought mode. The run goes to show how little technical indicators mean when fundamentals take hold. This run is certainly due to people finally figuring out that AMD is eating Intel's lunch and is a perfect example of what I call a "reality re-alignment". Intel itself was down over 3% today after it failed to thrill fans with increased guidance yesterday afternoon. Instead, they narrowed the previous revenue range and got punished.

On a final note, gold has been creeping up and is now pushing new highs at around $453. The move fits with the postulation that traders expect the Fed to halt rate increases. Several months ago I stated that holding metals would be a hedge against the Fed for those who wanted to hold short stock positions, the theory being that if the Fed inflated the market and busted short trades that the metals would rally and offset those losses. So far, this seems to be exactly the case, though the market is moving on expectation of Fed action and not the action itself.

Disclosure: Short INTC; Long INTC Puts


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