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January 11, 2007

Oil Change

Equities experienced the break to the upside I have been anticipating, and now look poised to make a final run to multi-year highs. I say "final" because the action feels very much like a speculative blow-off. News regarding housing and the economy in general is deteriorating by the day. Consumers failed to provide punch to the holiday season. Home equity withdrawal volume is collapsing, and the trouble brewing among sub-prime lenders will not be contained to the sub-prime arena as most hope or expect. In addition, to push tech shares sharply higher just before earnings season, especially when the number of earnings warnings have been accelerating over the last couple of quarters, is pure folly.

That said, there is no telling what it will take for a blow-off to run its course. Perhaps 1900 on the NDX? We'll see. As mentioned yesterday, I believe the market is in the process of forming a major top, so a turn could occur at any moment. I am itching to toss some S&P puts into the mix, but patience so far has served me well.

Energy enthusiasts were teased by higher oil prices this morning, only to get drubbed as the day progressed. While I believe lower prices are yet to be seen, today's action felt as much like a downward blow-off as the upside action in equities. Energy may be feeling around for a point from which to put in a corrective bounce and may provide a trading opportunity for those nimble enough to catch it.

The interesting point regarding today's oil slump is that precious metals held up, providing a sign that they may be getting close to standing on their own. Miners responded with only modest gains, though Silver Wheaton, which has been highlighted here recently, popped a healthy 3.7%. I unfortunately got spooked out of my trade a couple days ago due to nervousness over oil and a potential correlation effect. I was correct about oil, but not about the correlation. Anyway, I will probably take another stab at SLW or go back to my old favorite, Pan American Silver.

Another interesting observation for the day is the fact that high-fliers, Apple and Research in Motion, failed to participate in the NDX ramp. Apple may be just taking a breather, but the more I contemplate RIMM, the more I believe the psychology has shifted in an important way, so I shorted some.

Looking forward to next week, we will receive earnings from Apple, as well as Intel, Lam Research, Freeport-McMoran, Linear Tech, Lennar, Xilinx, and most major financial institutions. It will be an exciting and likely volatile week. In the meantime, we will hear from the Census Bureau tomorrow regarding December retail sales, so those trading retail shares could be in for a ride.

Disclosure: Short RIMM, Long INTC, LRCX, XLNX Puts


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