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June 7, 2006

Gold Medal for Greenspan

How ironic would it be if the U.S. Treasury minted a commemorative gold coin in honor of Alan Greenspan? Despite his apparent retirement, Washington can't seem to get enough of the former Fed Chairman. I would bet a gold coin that some sort of high honor will be bestowed upon him... assuming, of course, that Congress can organize itself well enough to do so before the disastrous seeds he has sown come to fruition. In the meantime, Greenspan was invited to testify before the Senate Foreign Relations Committee today where, in classic form, he eloquently stated a whole bunch of nothing about oil and the future of energy. Deciphering his testimony is very much like playing options: a zero-sum game.

On to more pressing issues... today's market saw the early carry-thru momentum I discussed in yesterday's post, but as the day wore on, equities were not able to hold those gains. Stocks spent the latter half of the day swooning, and they went out at half-percent losses. Given today's action, I find myself rethinking the notion of any type of serious counter rally. Technical indicators have been suggesting the strong probability of a sharp rally from these levels. Recent declines have seen low volume. Indices are resting on major support with momentum indicators pointing upward. Markets even put in bullish hammers yesterday.

But the rally isn't happening, and if it can't happen with all these indicators supporting it then something more sinister must be brewing beneath the surface. Perhaps too many traders are anticipating the aforementioned rally for it to materialize, which would mean the psychological setup doesn't really reflect what the technicals are telling us. Whatever the reasons, the probability pendulum appears to have swung back toward supporting further serious damage from here, and such a scenario jives with the bigger-picture theme of the return of Papa Bear.

One of the weaker sectors in today's session is one which many traders follow closely as a leading indicator to the economy and stock market: semiconductors. The SOX sunk sharply on the open, rallied back to just above par on the overall market strength, then sunk again to go out on its lows for the day, down 2.5%. The biggest losers include Intel, AMD, Broadcom, and National Semiconductor. In fact, there was not a single component of the SOX that sported a gain today. This weakness in semis lends credence to the point of view that we are on the verge of another round of serious selling.

Metals were down sharply once again this morning before erasing all their losses by midday and swinging to gains by late afternoon. Mining shares, particularly the two I watch most closely, Pan American Silver and Newmont Mining, continue to display good relative strength to the metals. I suspect that even if the metals slip a bit further, the miners probably don't have much downside left in them. Likewise, I don't expect them to rocket to new highs any time soon. Therefore, I figured the most prudent way for me to increase metals exposure at this juncture would be to write some NEM puts to go along with those I wrote on PAAS last week. Even if I'm wrong about the downside left in miners, I will be happy to take the shares at the effective purchase price offered by the puts.

Tomorrow's open for the market is very important because today's sell-off returned major indices to recent lows. The momentum types are seeking resolution, while buy-the-dippers are seeking validation. A breakdown will send both groups heading for the gates.

Disclosure: Short PAAS, NEM Puts; Short INTC; Long INTC Puts


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