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March 1, 2006

Jerk Soup

Will the real market direction please stand up? For the third straight day, traders were treated to a large market move, and each day has been in a successively different direction. A large tug-of-war is occurring, perhaps between those who belief we'll see a large rally once the Fed announces and end to rate hikes and those, like myself, who belief the market is toast. Perhaps both parties will be correct. For the time being I stand behind my recent assessments that the market is topping. These assessments are based on a technical evaluation in which I have a greater-than-normal level of confidence. Nevertheless, I'd like to see the breakdown begin for committing serious capital to the play.

By the way, it's time to sell Intel, at least according to a research note released from J.P. Morgan. The firm sees Intel's earnings coming in worse than expected due to an inventory glut. Who woulda thunk it? At least they let us know before Intel shares plunged into the low $20s, hey? The J.P. Morgan release was largely ignored by traders today, as Intel continued its week-long run… and I use the term "run" generously since were talking about an 80c (4%) move. Despite the price gains, Intel continues to replay curious behavior: that of high-volume selling during the half-hour into the close. If you view a 15-minute chart of INTC over the passed week, you will see the action. I suspect that strong hands are doing the selling in a classic distribution to the hopeful masses. If I am right, Intel shares will plunge again in the near future.

Newmont shares finally stabilized after a two-day swoon on the heels of its earnings release. I believe the reaction to Newmont's earnings is overdone and is simply a factor of the conditioning the public has received with regard to earnings releases. It is common... to the degree of comical... for companies to hit within pennies of estimates. When a company like Newmont publishes honest, unadulterated numbers that miss expectations, people panic and believe something is seriously amiss. What is truly amiss is why the SEC doesn't crack down on companies who impossibly hit their numbers each quarter only to eventually miss in a big way and rob investors of their capital.

Anyway, the plunge in NEM shares is providing an ideal buying opportunity. Remember that NEM was $50 in late 2004 when gold was trading at $400 per ounce. Gold is now 40% higher while Newmont has gained a mere 8%. Perhaps Newmont shares were grossly overvalued in late '04, but nevertheless, the performance disparity has likely left them grossly undervalued at this point.

Disclosure: Short INTC; Long INTC Puts; Long NEM Calls


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