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August 16, 2006

Running Up the Score

It has been a painful two days to be a bear. Bulls took advantage of their foothold to run prices up nearly a percent on the S&P 500 and nearly two percent on the NDX. The strongest sector on my radar was the recently dismal semiconductor group, which popped an impressive 4%, lead by Intel, AMD, and Broadcom. Despite a weak housing start figure and multi-decade low reading in home builder confidence, the homeys managed a 3% gain. Even the recently dogged transport sector trekked higher by 3.2%. With the exception of oil-related equities, the buying was pretty much ubiquitous, and it seemed like everyone who missed out on yesterday's bonanza was trying to get some action today.

Just about the only positive with which bears can console themselves is the fact that the markets are now massively overbought on an intraday basis. The current state may be set up for a bit of relief in prices, but looking at the daily charts, the technical picture suggests this rally will carry further. A word of caution, however. If we did, as I believe, reawaken Papa Bear back in May, traders should exercise extra care with technical indicators. Bear markets are much more volatile their bulls cousins, and therefore technical views tend to fail more often. The types of vicious counter-rallies which we may now be witnessing (assuming it is a counter-rally) can stop and turn on a dime at no particular technical point. For an example, take a look at the late-June to early-July S&P chart.

My strategy for the current environment has been to cover my weaker shorts and sit on my hands until a definitive reversal is revealed. By definition, this tactic concedes missing the first part of the next down move, but it is a more tenable strategy than getting caught in a continuing spike. I expect the downswings to be just as merciless to the bulls as the last two days have been to the bears, so I will quickly an aggressive get short when the time appears to be right.

Disclosure: Short INTC; Long INTC Puts


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