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May 17, 2006

Pause-itively Red

So now everyone is afraid the Fed will keep raising rates, hey? Who woulda thunk it? It seems the only pause traders are witnessing in the wake of last week's FOMC meeting is a pause in the twin bull markets in commodities and equities. The difference between the two is that once the U.S. economy begins slowing rapidly, which I believe will happen later this year, commodities will be the asset class that resumes its bull run as Mr. Deflation starts panicking.

I postulated yesterday that Hewlett-Packard's earnings report may set the tone for today's trading. Obviously, it did not. HPQ came across well in its release and managed a 3.4% gain, but the CPI report struck closer to home for traders, most of whom are more concerned with Fed policy than printer sales.

Today's CPI scare, in combination with yesterday's new home starts report, is having the effect of a one-two punch on the homeys. Building Materials Holding followed yesterday's 4% drop with another 2.3% today. The builders shed another 1.6%. Other interest rate-sensitive sectors were hit hard, as well. Financials were down over 2% as measured by the S&P Select Financial SPDR. Miners also suffered 3% losses as silver was clobbered for 4% plus.

Intel shares sank to a new, two-year closing low with today's 2.2% loss. Despite this weakness, I view the downside on this stock as rather tame considering the company's state of affairs and given the backdrop of a plunging market. There are a lot of people who maintain that INTC trades at bargain prices and expect a turnaround presently. Much like those traders who disillusioned themselves into thinking the Fed was done with hikes, the Intel supporters will capitulate at some juncture, and we will see sudden and sharp losses in these shares.

The break we've experienced over the passed five trading days seems quite ominous, and I anticipate much lower equity prices as the summer progresses. There is definitely a different feel to this weakness than what we saw in October or last April. With the shorts I've built up recently, red is rapidly becoming my favorite color.

Disclosure: Short BMHC, XLF, INTC; Long BMHC, INTC Puts


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