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September 6, 2006

Game On?

Finally a bit of respite for the bears. Today's session turned trading terminals across the nation red as the S&P 500 slumped 1% and the NDX fell 2%. No doubt, bears will have fun reading all their favorite blogs this afternoon, a simple pleasure that had turned sour over the last several weeks. Equities headed down straight out of the gate and, with the exception of a fleeting midday bounce, hardly looked back.

I have been writing that the next wave of selling would begin suddenly and upon the introduction of a catalyst. Although index futures were slightly negative overnight, they jolted downward once the Labor Department released its quarterly report on labor and productivity. Sharply higher revisions in unit labor costs brought inflation fears out of remission and renewed fears that rate hikes may not be history.

Granted, government figures have easily been shrugged off by bulls recently, but timing is everything. We are sitting on a market ripe for selling, and the more overbought we get, the less of a push it takes to get the snowball rolling. As always, the reaction to news is much more telling than the news itself, and today's reaction to the labor report tells me that the game is on for bears. I spent the tail end of today's session rebuilding short positions, and if the coming days confirm my read, I will add more.

The news from Intel certainly did not add cheer to the action, and likely helped propel stocks lower. Other members of the SOX certainly commiserated with INTC... the index fell over 3%. Heavy selling was seen in AMD, Broadcom, Marvell, Teradyne, and Xilinx. Suppliers such as Lam Research, Micron, Applied Materials, and SanDisk also saw multi-percent damage today.

Tech was not the only area experiencing heavy damage. Oil slumped over a buck, sending oil shares reeling more than 3%. A couple of my favorites, Conoco Phillips and Encore Acquisition, were hit for 4% and 5%, respectively. As regular readers know, I prefer to sit out this pull-back in energy rather than play the short side. I am simply reticent to trade against the major trend and would be happy to have the opportunity to repurchase these assets at lower prices. Oil certainly appears prepared to price in a U.S. recession. With so many pundits calling for $100 oil, the surprise here could be $50 oil in a few short months.

The ball is now in the bears' court. I am anxious to see if some downside follow-thru can be accomplished in the next couple of days.

Disclosure: Short INTC, MU, SNDK; Long INTC, SNDK Puts


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