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April 4, 2006

Impetuous Bulls

Equity indices continued their ambiguous journey, reversing precipitously once again. The latest twist was to the upside. An intraday S&P 500 chart now looks like a sharp-toothed bow saw. I must admit that despite the anfractuous tape over the passed year, I am quite surprised by the show of power by the bulls today. Taken out of a hat, today's action doesn't look so impressive, but in the context of the times... bonds fell yet again, the dollar got clobbered, and commodities are continuing to herald inflation... the fact that equities haven't collapsed is bewildering.

One stock followed closely on these pages, Building Materials Holding, put in a small bounce today, but was once again repelled by its moving average. Seeing volume continue to decline throughout the move that began in early March, I decided to add to my put option position. As a group, the homeys managed a one percent gain. Something put wind under the wings of Fannie Mae shares, but I saw no news on which to blame the updraft. The stock gained on the topside of 4%. Perhaps today's action was simply technical or was driven my investment bankers who are trying to pose FNM most favorably for their debt issuance tomorrow morning. Whatever the reason, I see an opportunity to fade the move. Given the nice volume on today's gains, though, I intend to wait in deference to a possible follow-thru move.

After perusing charts yesterday evening, I put two stocks on my execute list to short: Apple Computer and F5 Networks. Within ten minutes of the open, the shares were down $1 and $2, respectively. Not being one to chase trades, I let them go. Both stocks closed down sharply on heavy volume, so it seems the charts knew what they were talking about! As regular readers know, I feel naked not being short AAPL, and I continue to seek a favorable entry point. As for FFIV, the shares ultimately slumped 6% on massive volume. Will this stock go significantly lower? I think so, but again, I believe it is imprudent to chase trades. A nearly $8 fall in two days means that FFIV is either ready to crash or will bounce sharply. To trade it now would simply be too much of a gamble.

Those impetuous bulls seem poised to take another stab at 1310 resistance on the S&P 500. With the NDX also sitting at the upper end of its recent trading channel, tomorrow should be telling. There are clues to make both bullish and bearish technical cases. We'll just have to wait for more information from the market gods.

Disclosure: Short BMHC; Long BMHC Puts


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