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January 24, 2007

No Respect


My initial glance at index futures this morning induced a double-take. After a series of earnings bombs in tech finally seemed to awaken people to the massive inventory problems at all levels of the food chain, along with the technically weak behavior of stocks of late, the last thing I expected to see was NDX futures popping a half-percent-plus before the open. The number was so surprising, I had to log into my futures account and get a quote just to verify the print in the financial media. They were accurate, and, in fact, there was more upside to come.

The market is a cruel mistress.

The strength seemed to stem from the fact that Yahoo was rallying on the heels of its earnings report. Perversely, Yahoo's earnings were not the part of the report getting traders excited. Their earnings were, in fact, quite weak, as was the first-quarter forecast. The part that sent shares surging 8% was the announcement that the company would release its new ad system on February 5th "ahead of schedule." Less than a year ago, these shares were plunging because the ad system was being delayed. It's amazing what people swallow as "research" these days.

By the way, if the new ad system will be such a boon, why was first-quarter guidance so paltry? And certainly, a more competitive front for Yahoo would be bad news for Google, right? Nope. GOOG shares popped 4% with no other news to drive them. So, the prevalent mentality is still one of all news is good news.

In any case, S&P 500 futures were not as enthusiastically green as those for the NDX. Before scrambling to cover my shorts, I decided to give the market some leeway to spring a bull trap, much like it did to the bears yesterday. Unfortunately, the trap never sprung, but I was at least nimble enough to not only close my NDX short position, but completely reverse it on the breakout from the consolidation of the initial pop higher. This move helped me recoup half of what I coughed up on the overnight hold.

Precious metals sharply reversed their stance for the second day in a row, with gold and silver down over 1% in the early going. Mining shares seemed reticent to follow them down, which was a bit of a relief since the positions I added yesterday were in mining and not the metals themselves. As the session progressed, however, the metals fully recovered the early losses and sent mining shares soaring back into the green. One of the best gainers was an old favorite, Pan American Silver, which sported a nice 2.5% gain. Today's action reinforced my conviction that an important rally is dead ahead, and I added once again to my Newmont Mining calls.

I would love to offer a fresh, dismal forecast for equities, but with the SPX breaking out to new multi-year highs and the BoJ refusing to show any fortitude, the near-term outlook does not seem favorable for bears. If the carry trade is, indeed, the force behind the equity rally, a blow-off rally could be right in front of us. The liquidity should also help accelerate metals prices. It is this latter play that commands most of my committed trading capital at the moment.

Disclosure: Long PAAS; Long NEM Calls


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