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August 15, 2006

Hats Off to the Bulls

Bears today witnessed what they least expected: yet another Fed-is-done rally. After the release of a diminutive 0.1% PPI, index futures exploded and never looked back. I suppose the impetus for this rally was the removal of any doubt over whether the Fed was really done. In my mind, there was not any question about that, and I made the mistake of assuming my view on the issue was ubiquitous when I wrote in yesterday's post that I saw little potential for a PPI rally.

My view regarding an impending sharp sell-off has not changed. It is the market's way to instill doubt or overconfidence into as many participants as possible and then choose the path that fools the most. Anyone looking at a 2-week intraday chart of the S&P 500 will see how frustrating the August market has been for bulls and bears alike. Both have suffered sharp swings, and there is no discernable direction. Bulls did accomplish an important feat, though, by finally claiming a close above the much-disputed 1280 level on the S&P 500. Crucial to the bull case now will be a substantial follow-thru.

Interestingly, gold and silver went nowhere today, caught between the opposing forces of low inflation perception and the green light for the Fed to print more money. Eventually the world will realize that there is inflation... and lots of it... and that the Fed will print more money... and lots of it. That realization will mark the psychological turning point that we metals bulls need to catch and get ourselves in front of.

An ironic note for today's action is that Wal-Mart fell short of earnings expectations, blaming high fuel costs for reduced spending by its patrons. But, of course, there is no inflation.

Disclosure: Long WMT Puts


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