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July 28, 2006

Shackled Bear

The relatively weak GDP number published this morning instigated a Fed-is-done rally which lifted equity markets about one percent out of the gate. The nature of the rally was especially supportive of financial, housing, and consumer shares, all of which have been under a bit of pressure from the recent widespread realization that the deflation of the housing market may have a broader impact than was generally anticipated. It's quite ironic that people expect the Fed to step in and preserve their financial well-being when it is the very institution that has more likely ruined it.

Although housing and financial shares were big beneficiaries of today's celebration, they were not the only winners. The tech-heavy Nasdaq indices were solidly higher, and many of the recent losers, such as Lam Research, XM Satellite, Intel, Dell Computer, and eBay, saw multi-percent gains. Last week's earnings reports showing bulging inventories, burgeoning price wars, and slowing demand are now distant memories. Breaking up is hard to do, and Wall Street's love affair with technology is no exception.

Once again, every minute dip in the indices was immediately bought... a telltale sign of window dressing. The market's gains were all the more impressive considering how heavy yesterday's close felt. Surprisingly, metals were not surging along with the Fed-is-done theme. This fact makes me question whether the pop in equities really has much support. In the current environment, metals players seem like smarter money. That view will change as more of the crowd is gradually drawn into commodities trading. Anyway, I chose to refrain from rushing to cover all my shorts, though I did lighten up on the positions I consider riskier.

Last Friday I wrote about the markets being at a critical juncture where they could either bounce or crack wide open. Buyers managed to step it up and hold things together this week. With a Fed meeting 7 trading days away and widespread anticipation of at least a pause in rate hikes, it is hard to imagine there will be much motivation to sell between now and then. However, I can easily see how the Fed meeting could be a catalyst for the next round of selling no matter what comes out of it. A surprise hike would wreak despair upon the markets, while a pause could provide a classic sell-the-news setup.

Disclosure: Short LRCX, INTC; Long INTC Puts


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