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March 8, 2006

Oil Drilled

Oil got thumped for the third day in a row and seemed to drag down the commodity world with it. The recent failed rally in energy may be giving us a clue that industrial commodities will hit a rough patch. I made a case for panning energy in my Outlook 2006 article, and the same logic applies to other industrial commodities. Ironically, these same forces may drag down equity markets, as well, but more on that another time.

In commiseration with commodities in general, gold and silver were hit for 2% and 3%, respectively. Recently I've been talking about gold's impending break to new highs to follow silver, but today's action makes the situation seem reversed. Maybe gold was betraying short term weakness.

Yesterday I noted that Newmont Mining appeared to be in a better technical stance than Pan-American Silver, and therefore I had switched my trading position from PAAS to NEM. The move turned out to be prescient, at least for a day, since NEM held up pretty well under today's selling pressure, while PAAS got clubbed for 6%. For the record, I also closed out my PAAS call position, as well as my silver trading position.

Before anyone becomes distressed and calls me on the fact that I'm closing all these positions while touting the metals case, I'd like to note that I still have a substantial investment in metals-related assets. The positions being closed are only trading positions which had nice fat profits attached to them (I bought the PAAS calls and the silver trading position when silver was in the mid-$7 range). I began contemplating closing these positions a couple days ago, and, in fact, that is exactly when I should have closed them. A prudent practice, and one which I have verified empirically, is that positions should be closed out when the trader no longer perceives a strong advantage in holding them.

I'm not saying that I believe silver price is going down in the short term, only that I don't view the short term market clearly enough to risk that it won't. I could very well be re-opening my trading positions at higher prices in the near future, but that's the way it goes sometimes.

Stocks traded in a narrow range today, so it would be frivolous to read too much into the late-day recovery. The S&P 500 is simply meeting support at its moving average, and the NDX could spend the next couple days edging higher to back-test the bear wedge it formed in February. Nevertheless, I still contend we are heading lower in the coming weeks.

Housing stocks, however, caught a rebound that may be more worthy of attention, especially given their oversold readings. I rode the current wave down in this sector via shorts in Building Materials Holding and Freddie Mac, but I would like to short some of the home builders at some point. Perhaps an interim rise from these levels will give me the chance. We'll just have to sit patiently and see how the situation develops.

Disclosure: Long NEM; Long NEM Calls; Short FRE


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