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October 25, 2006

Is It November, Yet?

With an uneventful Fed meeting now brushed aside, the tape is an empty canvass ready for end-of-month painting, and it seems the artistic urges of fund managers got a head start this afternoon. We had very bearish divergences in hand on an intraday basis in conjunction with a bearish candle (orange arrow). As would be expected, the market began to break down, but the selling met an abrupt end, and the market edged higher over the next 90 minutes and into the close.

stock chart

Perhaps my mind is just playing tricks on me, but that 90 minutes of buying seemed quite labored, even forced. I am curious to see just how much strength the bulls can muster between now and Halloween as it may be a clue to what November will bring. A couple months ago, there were many comparisons made between the tape of 2000 and the tape of 2006. Both years saw a spring breakdown followed by a rally to new highs on the S&P 500 by fall. The postulation put forth by the pundits was that the market would collapse in September as it did in Y2K. One important factor was overlooked: timing.

In Y2K the spring swoon came a few days after the beginning of March. This year, the slump started a few days after the beginning of May. So if one truly believes these two years will rhyme, one should expect this year's sell-off to begin at the beginning of November.

For the first time this week, gold and silver did not start the day with 2% losses. Both metals added 1% in conjunction with a modest fall in the U.S. dollar. Mining shares, which had shrugged off the scares of the last two days, celebrated by rallying 3%. Newmont Mining has now enjoyed three consecutive days of nice upside volume, and I am toying with the idea of adding to my calls.

Amazon reported earnings last night and gave traders a lesson in gauging expectations. Despite a nearly 40% drop in earnings, AMZN shares surged 12%. Why? Most likely, droves of short sellers were forced to cover positions since Amazon's results were only horrible instead of horrific. The good news for those of us who would like to be short Amazon, but decided to sit out earnings, is that we will get much more for those shares when an opportunity presents itself.

Disclosure: Long NEM, NEM Calls; Short NEM Puts


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