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February 9, 2006

Heavy Tape

The Dow Jones Industrial Average closed higher by about 25 points, and that's about the only bright spot for bulls to hang their collective hat on today. The S&P 500 went out on the day's lows, down a couple points, and the Nasdaq 100 and Composite indices lost one percent and a half percent, respectively, lead by another heavy bout of selling in spec stocks. Examples of today's losers include Apple (down 5.6%), Google (down 2.8%), Yahoo (down 1.5%), F5 Networks (down 3.9%), and eBay (down 2.4%). Another Nasdaq 100 component, Whole Foods, slipped 9.4% after missing previous guidance in its earning report.

Yesterday, I highlighted how both the S&P 500 and Nasdaq Composite were struggling with resistance at their moving averages. Both indices came out with guns blazing today, and both slumped heavily into the close, failing to hold the MAs and even closing lower... a very weak showing. I have been reading notes of some very successful traders who, although bearish in general, believe that the market is likely to rally in the coming weeks after having survived earnings season intact. They believe that bad news is most likely to be contained within earnings reports, and that the void between this earnings session and the next... in other words, the void of bad news... will be used by bulls to ramp up stocks.

I respect these traders immensely. They have generally been better in timing the overall market than I, and the scenario they put forth has served traders well more often than not. But I have to disagree with them at this juncture. While the void of bad news may very well occur, I do not believe a rally will materialize. The tape appears very heavy. Shares of highly touted stocks, such as Intel, Apple, Google, and Yahoo, are being dumped on high volume. The indices are failing to hold early gains. Stocks in the financial and housing sectors... partners in crime in our latest asset bubble... are slumping, which is also a logical precursor to a broader market decline.

A market slide at this point would surprise the most number of people, professionals included, and I believe that is what is about to happen. If the markets were able to put in a couple days of upside on strong volume and close decisively about their resistance levels, I may change my mind. Let's see how things play out.

Bucking today's trend, the retail sector put in a strong showing, spurred by improved guidance from Best Buy. Regular readers know that I've been touting the consumer slowdown story, driven by a slowdown in home equity extraction. I do not see BBY's raised guidance as evidence that the consumer slowdown scenario is bunk, but rather that it will likely be a couple more quarters before we see widespread evidence. The housing market appears to have peaked last July. Macro changes in the economy take time to reverberate, sometimes many quarters, much like changes in interest rate policy by the Fed take several quarters to be felt. That the homeys began another serious bout of selling a month ago may foreshadow a sell-off in retail, but I don't know what the lead time will be. We'll just have to keep our eyes open for the appropriate signs.

Best Buy's guidance upgrade pertains to their 4th quarter, December through February, and while raised guidance comes as a small surprise, the valuation being put on Best Buy causes my eyebrows to rise... and trust me, those facial muscles must work harder than the average person's to raise my heavy brows! At the upper end of guidance for year-end 2006 ($2.29), BBY shares are trading at 23 times… a little pricey for a company facing significant macroeconomic hurdles in the coming months. It seems that little or no risk is being considered for BBY's future. Although my current BBY puts will likely expire worthless, I will be looking for a point to reload further out on the spectrum.

Gold and silver popped strongly today, up just under 3% each. As I said yesterday, I believe the slump of the passed few days is only a shake out, and the shinies will end up much higher in the near future. My favorite miners, Pan American Silver and Newmont Mining, both rebounded strongly with the strength in metals. If the month-long dollar rally fails and turns south, which I believe is imminent, a metals rally could go through the roof.

Disclosure: Short AAPL, INTC; Long YHOO, INTC, BBY Puts; Long PAAS, NEM Calls


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