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March 24, 2006

Glitter

Gold came back to life today, picking up a ten spot and pushing the yellow metal back above the $560 level. The move sparked Newmont Mining shares to an early 3% gain, yet NEM spent most of the day declining off those levels and closed up only a half percent. Why Newmont could not hold its gains in the presence of a 2% move in gold is a mystery. Ironically, Pan-American Silver was up 4% while silver gained a paltry few cents. I don't have a handle on near-term metals action, so I remain sitting with my base positions and probably will do so at least through the Fed meeting next week.

Speaking of which, I can't shake the feeling that traders will continue to be disappointed by Fedspeak. Bernanke and Company are focused on defending the dollar and therefore have no incentive to throw the stock market a bone until such a move is forced upon them. Therefore, as far as FOMC verbiage goes, I don't expect next week's taradiddle to be much different than that of the last dozen meetings. What may be different are people's expectations going into the meeting, so how the market reacts will be very important.

As any active trader will tell you, the stock market has been in a stasis of late. Since November, the S&P 500 has been locked into a 70-point range while the NDX has traded even more narrowly. It seems the market has run out of buying power, yet no one wants to sell nor is anyone brave enough to go short for fear the Fed may pull back on its hiking policy. If this analysis is correct, the long side could be a no-win proposition. Should the Fed indicate an end to rate hikes, there is no buying power available to fund the would-be celebration. The lack of such a party could beget selling. On the other hand, if the Fed persists, traders may start throwing in the towel, and we'll see some nasty downside.

Despite this likely scenario, I find myself reticent to build short positions. I am comfortable with the fact that I will catch the beginning of any serious downside via my short positions around Intel, and once I recognize that Papa Bear has returned, I will get seriously short, even if I'm 10% late.

Disclosure: Long NEM Calls; Short INTC; Long INTC Puts

 

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