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May 19, 2005

Ramp Job II

Short traders this month are struggling to determine whether our month-long rally is the start of a larger move upwards or just a blip in the market’s eventual demise. I will argue the case for a blip.

It was only a month ago today that an interesting data point (which I unfortunately was not aware of at the time) hinted that we may see a sharp rally. On April 19 the number of odd-lot short sales hit an all-time high, an indication that the small fry was feeling negative and betting on it. As we all know the market gets a kick out of punishing the masses, and so they have been squeezed. At what point enough of them have been cleared out to resume our slide is unclear, but I’m waiting for some (unknown) sign to increase my short positions.

It also seems that this rally has latched itself onto some relatively weak good news and completely ignored bad news. I’ve argued previously that the government’s inflation numbers are bogus, yet the bond market keeps cheering each time the government throws these numbers at us. Intel rocketed up as investors were told of miniscule increases in margins (which could have easily been manufactured through inventory shifting) and empty words of encouragement from management. Texas Instruments has rallied after barely beating a number they lowered just weeks before. In other words, a rally was in the cards, but it has no substance. It takes concrete good news to sustain a new bull market.

It is also interesting to note that Intel has closed above its opening price for 15 consecutive days. I would speculate that the first day from now that INTC closes significantly below its open price will be a good time to initiate a short. We’ll wait and see.

On another note, precious metal stocks have melted over the passed few weeks while the metals themselves have gone down, but not dramatically. I believe the underperformance of the stocks is simply an unwinding of a speculative premium that was built into them. The fundamentals for a long-term PM rally, namely inflation and a depreciating dollar, are still in place.

Disclosure: Short INTC, TXN

 

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