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May 30, 2006

Just Say No to Stocks

A continued build-up of fear over rising interest rates knocked the wind out of stock prices from the get-go this morning, so we didn't get the rally into which I was hoping to sell. Though I wrote of a suspicion on Friday that the market could fool the most people by continuing to slide, I did not express that suspicion in the form of additional shorts.

The S&P 500 was off three-quarters of a percent within five minutes of the opening bell, while tech-heavy indices lost a full percent. We drifted slowly lower most of the day until the last hour when the bottom fell out, resulting in 2% losses in the tech indices and just shy of 2% losses in the S&P 500 and Dow. Smaller issues were pounded, with the Russell 2000 index off 2.7%.

Part of today's overall weakness could be attributed to Wal-Mart's disclosure this morning that May sales will come in at the low end of expectations. Perhaps it's just a small data point, but this news sparked an idea in my head that we could finally be witnessing a deepening change in psychology toward retail stocks. Companies like Best Buy and J.C. Penney have seen some serious technical damage done to their stocks recently, but appear a bit oversold at the moment. Scanning the retailers in my list, I narrowed in on Circuit City and shorted a small amount. I briefly considered the options, but saw no striking value there.

SanDisk took a beating after Barron's pinpointed some of the company's troubles, namely that capacity among the players in the flash market is doubling at a time when end demand is softening. The inevitable results of these developments are price wars and big write-offs, and such a scenario will impact other big players like Lam Research and Intel, as well.

Barron's also ran a cover story on the deepening troubles of the national housing market. I'm not sure how much of today's damage among housing-related issues can be attributed to the article, but the damage was deep. Home builders fell 3% as a group while one of my favorite stocks to short, Building Materials Holding, fell nearly 5%.

Despite the weakness displayed today and the widespread anticipation of a counter rally, I remain dubious about the market simply going straight down, so I continue to keep my trading fingers ready for a sucker's rally.

Disclosure: Short SNDK, INTC, CC; Long SNDK, INTC Puts


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