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June 23, 2006

More Inaction

Another yawner slipped by us today in action that is feeling more and more like the calm before a storm. The market attempted a quick breakout around midday, but the advance was quickly halted, then slowly erased. Neither side moved with much conviction, and the only sector of note was oil services, which put in a nearly 2% advance as a group, despite a flat day for oil. An old favorite of mine in this area, Encore Acquisition, popped 6.5%. Following the analysis of my last posting of stock charts, I picked up a block of EAC shares earlier in the week.

Encore shares have been bashed to the tune of 40% since their September peak, despite the fact that oil remains at roughly the same price. As with the miners, I have the perception that most, if not all, of the ugliness has been seen in these equities, and I took the technical strength as an indicator for a low risk entry point. Hopefully, this breakout will produce a follow-thru, but if the breakout doesn't hold, I'll be on a quick trigger to get out and wait for a more promising entry. For those readers who were not around to read my discussion of Encore last year, my primary attractions to the company are its size (providing for leveraged growth potential and the possibility of being acquired) and its proven management (tempering the risks associated with smaller operations).

Next week brings us more data on the state of the housing market, end-of-quarter trading, and a grand finale orchestrated by Chairman Bernanke. I took advantage of this morning's opening weakness to further reduce some put option positions, both to stay out of the way of next week's drama and to increase my firing power once I feel I have a handle on which way things may break.

Disclosure: Long EAC


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