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April 5, 2006

Resistance is Futile

As expected, the market made its run to conquer resistance at 1310-11 on the S&P 500. A nice battle was fought over that level for a span of about 2 1/2 hours until the index finally burst through with less than an hour left in the session. I wouldn't call the break decisive, though. The widely-followed index meandered above previous resistance for less than 15 minutes before settling back down within its old range. Nevertheless, bears will find little consolation from any of the major indices, most of which conquered new multi-year highs. Even laggard groups played a bit of catch-up, with the SOX up about 3% and home builders up 4%.

The media would have us believe that the market mustered its strength from outlook for a positive earnings season. At the same time, reporters are trumpeting the end of the interest rate hike cycle based on comments made by a couple of Fed governors yesterday. It seems perverse to assume we will get the best of both worlds: a strong economy and lower interest rates from the Fed. However, based on the recent performance of equities, it appears that this rosy scenario is exactly what is expected.

The assumption that the economy is chugging along begs the question, why would the Fed begin cutting rates, or even stop raising them, in the face of a robust economy? There is no post-bubble fiasco in need of rescue (yet), and despite what Fed governors say publicly, they are all worried about inflation. Besides, the Fed's number one priority right now is defending the U.S. Dollar so that this country can go about its free-wheeling ways. We will see no relenting move out of the FOMC until markets force their hand.

Nevertheless, traders frolicked gleefully in the end-of-rate-hikes garden, sending interest-rate sensitive equities skyward. Building Materials Holding joined the home builder's fray with a comparable gain. Fannie Mae managed to follow-thru on yesterday's move, gaining another 2%. I refrained from shorting FNM yesterday in deference to the possibility of such a follow-thru, and I intend to continue deferring until I see some shortable weakness.

Of course, a big story today was the announcement from Apple Computer that its Intel-based Macs will have the ability to run Windows XP. The news vaulted Apple shares skyward to the tune of 10%. Although the news was greeted with much fanfare, it is hard to imagine what material effect this new twist will have on Apple's bottom line. After all, if one wants to run Windows, why not buy a generic PC for less than half the price of a Mac? Most likely, Apple shares were due for a technical bounce and/or short squeeze, and this news was simply a catalyst for the action.

Tomorrow will be important for the bulls. They will be out to prove that today's conquest of resistance was more than temporary. Let's see how they do.

Disclosure: Short BMHC; Long BMHC Puts


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