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March 22, 2006

Mean Reversion

If boredom levels on Wall Street are mean-reverting, the deeply over-bored state we are experiencing should be inflecting upward presently. In today's action, stocks traveled sideways, with a slight bias to the upside, to give us half-percent gains in the major indices. No single sector managed to stand out from the crowd, and the only significant mover on my screen was Research in Motion.

RIMM shares slid 3% today and have now dropped about 9% over the passed five days. To answer the question immediately coming to some readers' minds: I see no compelling reason to open a short at the moment. Perhaps RIMM will continue into the abyss from here, but as I've stated before, with a stock as volatile as this one, I'd rather be fashionably late to the party than awkwardly and unprofitably early.

Last night Microsoft announced it would be delaying the release of the consumer version of its new operating system. The delay will push the release beyond this year's Christmas season, which is bad news for a host of companies (such as Intel) that usually benefit from the release of a new Microsoft OS. The news initially put a damper on tech stocks, with NDX futures trading down almost a full percent overnight. The slide turned out to be a bluff. By morning the damage was contained to MSFT, which dropped a diminutive 2%, while the NDX closed green.

This tape simply refuses to roll over. Perhaps too many traders are still bearish or cautious to warrant significant downside. Perhaps we simply lack an external catalyst to jolt the markets. In any case, the chances for an immediate drop are slim. The end of the first quarter comes next Friday, and we are likely to undergo the now traditional, and still illicit, activity of EOQ window dressing by fund managers. With mutual fund cash levels near all-time lows, any significant push could result in exhaustion of buying power, leading to the beginning of something nasty in April. I'm not saying this will happen... it's just a thought.

Nevertheless, I decided to err on the side of caution by closing my Apple Computer short. I scored a 5% gain over the course of a week, which is not bad in this staid state of volatility. I still expect to see AAPL shares much lower this year, and maybe I'm out-guessing myself by jumping in and out. I simply prefer to see the odds more in my favor.

Disclosure: Long RIMM, INTC Puts; Short INTC


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