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January 20, 2006

Just What the DOCtor Ordered

An army of bears, with myself included, will be staring at charts over the weekend, not because we have homework to do, but because it's just fun to stare at charts when you're right. The major indices suffered their worst one-day declines in over two years, and technical indicators would suggest that there is more downside to come. As suspected, yesterday's weakness in champions Apple and Google, as well as top formations in financial stocks, were important clues. Google fell an additional 10% today, Apple 4%. The XLF dropped 2%, fueled in part by a disappointing report from Citigroup.

Only one tech stock on my screen managed a gain: F5 Networks popped 4% on strong earnings. I have discussed FFIV many times, stating my expectation that their margins will be crimped by impending competition from Cisco and Juniper. To this point I have been sorely wrong about timing, but nevertheless know that the story will eventually unfold. Fortunately, my trading model, along with a fear that FFIV could be acquired, has kept me away from shorting this stock for a while.

Equities were in no way helped by the energy sector today, as oil soared 2.5% and was up nearly 4% at one point. Despite oil's strength, oil-related stocks lagged. The XLE gained less than 1%, and several oil services companies on my screen were actually down. Equity traders still do not believe in the latest oil rally. Although their disbelief is not too surprising… oil-related equities tend to lag price moves in oil due to its volatility… these stocks will have to play catch-up in a big way should the marketplace maintain $65+ oil. Commodity traders who missed the latest oil move and believe that the rally will hold may consider purchasing shares in lagging oil service companies.

Retail also slid today, though the 1.7% drops in retail ETFs did not match the 2%+ drops in broader indices. The charts of companies like JC Penney, Circuit City, Target, and Bed, Bath & Beyond are looking very weak. JC Penney in particular just put in a double top followed by a gap down and has the potential to slip back to its October lows in short order. Best Buy and Circuit City, both of which have been strong beneficiaries of the housing ATM, also have appointments with disaster, but have held up well so far.

Gold and silver fell 1% and 2%, respectively, and mining stocks dropped in tandem. Especially hurt was Newmont Mining. I'm not exactly sure why the downside was exacerbated in NEM today. Perhaps it is simply profit-taking after a phenomenal 10-week run for NEM shares, but traders should note that this company, through its purchase of Canadian oil resources, is fully hedged against the cost-of-production impacts from rising energy costs. Their hedge is exactly why NEM is my favorite gold miner.

Next week should prove to be very entertaining! Bulls will be antsy, hoping not to get trapped. Bears will be anxious hoping that Papa Bear has been stirred from his slumber. I feel that the safer bet is now on the bear side. After today's slump, there will be tremendous resistance should market highs be revisited.

Disclosure: Short XLF; Long JCP, BBY, BBBY Puts; Long NEM Calls


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