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September 18, 2006

Reversal of Fortune

Today's session started out in very familiar fashion... a positive open, followed by slow, grinding gains during which every little dip was bought. Major indices then teased bears with rapid half-percent sell-offs around midday before reversing and closing flat. The interesting point to me was the large number of recent momentum stocks that gave up solid gains to close lower or only marginally higher. See SanDisk, Research in Motion, Motorola, Netlogic Micro, Lam Research, and Micron Tech for examples.

This market feels very tired, and from both technical and psychological points of view appears ready to fall. What catalyst will instigate the selling is anybody's guess, but we do have a number of important economic numbers being published this week, as well as an FOMC meeting on Wednesday. A negative surprise from any of them could tip the scales. In fact, if the market hears exactly what it expects from the Fed, we could very well see a sell-the-news reaction.

I have discussed many times my expectation that once the market starts downward, it will fall quickly and severely. The psychological setup supports this view. Bears are so burnt out from the recent resilience of equities that a large portion of them will be quick to take gains once the selling begins. Likewise, bulls are so emboldened, that a large portion of them will buy the initial dip. In other words, the next sharp dip will be accompanied by a rapid change of sentiment into the bullish camp, thereby setting up a contrarian's dream shorting opportunity.

Naturally, this is all conjecture on my part, but it is quite plausible and is the game plan I'm using for the moment.

Precious metal saw some rebound today with gold and silver up one and three percent, respectively. Miners likewise recovered around 3%, though my two favorites, Newmont Mining and Pan American Silver, were laggards. I added a small trading position in NEM on Friday, suspecting that this group was due for at least a bounce, but I have yet to see the light with regard to the aggressive long-term positions I anticipate holding at some point.

We receive a new, bogus PPI number from the Labor Department tomorrow morning. Unless the figure is way out of line with expectations, the market will likely display the same type of stasis we see ahead of most Fed meetings. However, I would be very surprised to see this week unfold as nauseatingly torpid as recent weeks.

Disclosure: Short SNDK, RIMM, MU; Long SNDK, RIMM, MOT, LRCX, MU Puts; Long NEM

 

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