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June 19, 2006

Passing Time

Stocks fell again today with most of the headlines in major news sources blaming the weakness on continued fears over interest rate policy. In fact, there was no news on which to pin the action, so reporters were simply grabbing the most recent topic in order to have something to write about. To me, the session had the feel of more consolidation on the heels of last week's pop. Bulls and bears have reached a temporary stasis, and while breaking news could swing prices quickly one way or the other, it seems the more likely path involves a bit more of a rally before the next slough. If were on the verge of a new downswing, one would expect the market to close weak, but in fact, stocks held their own in the final hour.

That said, I added another small block of Intel puts to my collection around midday when the shares were up 2%. I don't have enough conviction about the aforementioned expectations for a further rally to simply sit back and wait for it, especially when I see an attractive opportunity. One of the challenging aspects of trading is balancing expectations with action. In the current environment, I see taking baby steps toward the positions I want as being prudent behavior. If a rally materializes, or if the environment suddenly turns very weak, more aggressive action may be warranted.

The National Association of Home Builders reported that its builder confidence index fell this month... its eighth straight month of decline... to the lowest level in 11 years. No doubt, contrarians will be coming out in droves to proclaim an end to housing market troubles, but this news hardly marks a turning point. The NAHB's index has just dipped below 50, and it is unlikely such a large bubble will end peacefully. We need to see despair, both on the part of home builders and home speculators, before we can start pondering a turning point. While these confidence levels continue to slump, my attention will be focused upon playing the aftermath of the housing bubble burst, namely its effects on consumption.

Speaking of consumption, Circuit City reported quarterly earnings that were stronger than expected, but the shares got punished when management failed to raise guidance. Best Buy spoke in a similar tone last week when the company also declined to raise guidance. These actions could be the first clues to a turning point in consumption or perhaps just a conservative approach by management in order to beat the guidance. We'll have to wait for more clues to know for sure.

Disclosure: Short INTC, Long INTC Puts


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