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May 12, 2006

Selling Begets Selling

Stocks leaped into negative territory out of the gate today and stayed there, going out on the lows. All the major indices fell in excess of one percent, with the Russell 2000 being hit the hardest, down 2.2%. Since my shorts are disproportionately focused on components of the Nasdaq 100, the action in the NDX is of particular interest to me. An important support level for this index has been 1635, and once the NDX hit that level, its decline was stopped cold. Market watching got fairly boring after that, as the market drifted in a narrow range. We ended the day with the NDX sitting right on top of support.

I will be watching very curiously at Monday's open to see whether 1635 can be held. Should that level fail, my glee will be mitigated by memories of several false breaks since the beginning of last year, but resolution will at least give us a clue as to how much bidding power remains in the hands of bulls.

The NDX component for which I have the largest short position is Intel. These shares also rest near an important support level and, indeed, with all the program trading going on at major trading desks, the fate of the NDX may very well rest with the fate of Intel shares. If the performance of Intel's partner in crime, Dell, is any indication, we could be on the verge of collapse. Over the last four weeks, Dell shares have plunged nearly 20%, and they've been cut nearly in half in less than a year. I cannot imagine that Dell would suffer so much trouble on the consumer level without the buck being passed up the supply chain at some point.

Today's other swooners include Google, which got dumped to the tune of $12, as well as a host of consumer stocks such as Best Buy, JC Penney, Nordstrom, and Circuit City. I feel a bit naked having not yet built shorts along the consumer theme, but these stocks have been wicked to us shorters. There will still be plenty of downside to catch once the charts break down definitively.

Another winner in the shorts department was Building Materials Holding which fell 2.5%. BMHC shares have yet to violate the low set on its late-April earnings day, but with the cogs of the housing industry noisily grinding slower, it seems only a matter of time. Interestingly, BMHC once again bounced off the underside of its moving average, demonstrating why it is so important to use the proper MA for a stock rather than the ubiquitous 50 and 200-day averages. (I use MA85 for BMHC.)

Unfortunately, one of the victims of our two-day lashing was 3COM, my token tech long. I bought a smattering of these shares several months ago because the company has positioned itself well via a very profitable joint venture with a Chinese company. Having a long position in the tech world also provides a hedge against all my shorts should my overall market expectation not come to fruition. Despite the 6% hit, I intend to hold the position for a long time, and perhaps even add should the price slump further. I believe 3COM shares could be explosive at some point.

Silver finally showed its first sign of exhaustion, slumping 40c. Gold finished the day flat, but mining stocks were panned once again. It was a lot of fun watching the miners get pounded since I do not currently own them. At some point this year, Newmont Mining and Pan American Silver will be screaming buys again, and I plan to be aggressive with them if I am fortunate enough to recognize that point.

Disclosure: Short INTC, BMHC; Long INTC, GOOG, BMHC Puts; Long COMS


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