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October 13, 2005

Say Hello to Volatility

Today's equity action was reverse image of what we've seen over the passed two weeks. After being down about a half percent in the early going, the Nasdaq Composite managed to rally to close up a half percent for the day. The reversal seemed to be limited to tech stocks since both the Dow and S&P 500 closed flat.

A few of my favorite shorts, Best Buy, F5 Networks, and Research in Motion, all managed 2% gains. Apple snapped back big, gaining nearly 9% after falling sharply yesterday on its earnings news. It almost felt like a Mac AttackĀ… all the Apple fans in the world were placing bids under the stock today. All these gains, though, bring out the vulture in bears like me. I'm just waiting for the right moment to pounce.

Drooling aside, today's action drew out my safety net. I reduced exposure to my XM Satellite and Toll Brothers puts. Rapid market drops are usually interspersed with wicked rallies, and I just have the feeling we may see one soon. On the other hand, once in a long while these types of drops are followed by crashes. Hopefully, in the next few days I'll get a better feel for what's going on and will position myself accordingly.

Despite my caution, I would be amazed if the street managed to pull off any substantial rally, given the environment we are in. Companies are missing guidance left and right. Evidence continues to mount that the Great Consumer Expansion is running out of steam. Interest rates seem to have no place to go but up. Financial scandals continue to infiltrate headlines (Refco announced its illiquidity today). And confidence in out President is at a level not seen since the frustrating days of the Carter Administration. Tell me who is brave enough to buy long-term here.

Disclosure: Short FFIV, RIMM; Long XMSR, TOL Puts


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