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December 19, 2005

Red Dawn

Last week I postulated that the final two weeks of the year would see either 1) the market elbowed higher by fund managers taking advantage of the low volume environment, or 2) traders and fund managers trying to get a jump on an anticipated January sell-off. Scenario two was certainly in play today as the Nasdaq Composite shed 1.5%. Today's selling appeared to be concentrated in the tech sector since the S&P 500 and other broad measures were down only about a half percent.

One stock in the tech arena stood out from all others in today's action, and it is a stock that is accustomed to the spotlight: Google. After being up more than $16 on news of its prospective deal with AOL, Google shares put in a massive reversal and finished down $6. A reversal of this magnitude in a bellwether stock cannot be a good sign for the bulls. Combined with other factors weighing on the market… factors which I've discussed here previously… I believe that today's fall signals the beginning of a larger and more sinister move downward.

Housing stocks also had a moderately rough day, with losses of between 1-3% across the board. The upward trend lines for some big names like Centex, Beazer, Pulte, and KB home are still intact, but given the technical damage already done to the sector, not to mention the selling woes seeping into the housing market, it is only a matter of time before these stocks relent.

And on a closing note, 'tis the season to be following the retailers. Best Buy, Target, and Wal-Mart all had a bit of damage done to their share prices today, but Circuit City broke from the pack with a favorably-interpreted earnings release. Circuit City shares tacked on about 6.5% after reporting that third quarter sales increased 14%. The sales increase was augmented primarily by huge sales growth in flat-panel displays and portable digital-audio products. It's funny that only last week Best Buy lamented weakness in the same categories. Given that CC saw an erosion of gross margin as well as a paltry earnings figure in the face of a 14% sales increase, it could be that they accomplished these sales by slashing prices dramatically. A bit of research on their per-unit sales prices in those big categories could prove to be very revealing.

Disclosure: Short BZH; Long BBY, WMT Puts


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