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August 8, 2006

Sell the News

The widely anticipated pause in rate hikes happened today, though as was hardly expected, not much else did. After the FOMC announcement hit the wires, stocks vacillated in a narrow range, unable to decide what they were supposed to do. Bulls had been expecting a follow-thru rally, while bears anticipated a sell-the-news reaction. As is the nature of the market, both sides were proven wrong.

It is, of course, also the nature of the market to instill as much doubt as possible into its participants. The winners are the ones who possess little doubt, and also turn out to be right more often than not. What I have little doubt will happen is that a sell-the-news slump will still occur, and I backed up this conviction by selling more stocks today.

The primary focus of my efforts continues to be tech stocks with inventory problems and the companies that supply them. My Intel put position has been swelling, and I am watching SanDisk for a favorable point to add to my positions. Lam Research has also been very weak in this recent rally, and I suspect their shares will see great pain in the near future.

I also believe that Phase II of the housing meltdown, now underway, will impact mortgage lenders and consumer stocks. Lenders heavily exposed to low-quality credit, such as Novastar Financial and Washington Mutual... via its purchase of Providian last year... are likely to suffer. WaMu also has enormous exposure to the Western mortgage market and a history of poor duration management. Banking shares in general are looking toppy and may feel pain as recession heads our way. See the charts of Bank of America and Wells Fargo for examples.

Contrary to popular belief, precious metals were nonchalant about the pause in rate hikes. As with stocks, my expectations have been, and continue to be, for a sell-the-news reaction post-pause. However, at some point in the coming weeks, gold and silver, along with commodities in general, will break their correlation with stocks and head dramatically higher. With the pause out of the way, the hunt for a re-entry point into metals is on.

Disclosure: Short INTC, SNDK, LRCX, WM; Long INTC, SNDK, NFI Puts


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