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April 6, 2006

Silver is Golden

Silver continued is amazing journey skyward, putting in yet another 2% up day. Several months ago I wrote of my expectations for this metal to spike beyond imagination... a move that would draw the masses into the metals game... and that such a spike would coincide with the return of Papa Bear to equities. We have yet to see this latter development, but I believe it is not far off. I also wrote that the spike in silver would be followed by a sharp retreat to burn all these latecomers. If my instincts eventually prove valid, the sharp retreat should not occur until Papa Bear has proven his return, so despite the scale of the move thus far in silver, we may yet see more upside.

Once again, the large miners failed to participate in any material way in the metals rally. Pan American Silver dropped 2% while Newmont Mining tacked on a little more than 1%. It is possible that the lag in PAAS shares are due to fears over tomorrow's Peruvian elections. There is widespread concern that a new leader will move to nationalize silver mines, some of which are operated by PAAS. While caution is always prudent, common sense would dictate that the fears are a bit overblown. No candidate appears to have the political clout necessary to move quickly toward nationalization. Latin countries would face tremendous international pressure against such efforts, given the amount of foreign aid and investment that has poured into the region over the last decade. A continued pullback in PAAS shares will set up a wonderful trading opportunity.

Speaking of spikes, the recent updrafts in Google and Apple Computer both smell of a suckers rally. Moves such as these have the affect of calming the hearts of bullsÂ… and striking disdain in the hearts of bearsÂ… who have been wary of a market downturn. The two partners-in-crime that lead the market over the passed three years show resilience, bring traders heavily back into the market, and then burn them with a collapse. This postulation may seem a bit cynical, but cynicism has served me quite well when trading.

Apple's gain, along with nice moves by a slew of other Nasdaq 100 components, including Yahoo, XM Satellite Radio, Amazon, Bed, Bath & Beyond, Starbucks, and Whole Foods, contributed to pushing the Nasdaq 100 into positive territory, while the S&P 500 fell slightly. We continue to get bearish divergences in important momentum indicators on these two indices. Neither the RSI nor the bullish percent peaks are confirming the last several peaks in the indices. I believe we simply lack a catalyst to sink the market. With commodities continuing to signal inflation, bonds approaching multi-year highs in rates, and earnings season upon us, there are plenty of landmines for equities to stumble upon.

Speaking of earnings, another NDX component, Research in Motion, will report this afternoon. Given the suspiciously well-timed settlement of their lawsuit... if you remember, it coincided with a very negative mid-quarter report that was conveniently pushed into the backdrop... I suspect that RIMM won't have a nice evening. Nevertheless, I consider it too much of a gamble to play at this point. I still have some way out-of-the-money puts which I purchased last year, but at this point, I don't expect much from them.

Bonds continued spiraling today, pushing long rates above 4.9% again. All the folks who are giddy about prospects of a halt to hikes in the Fed Funds rate should take note that rising long rates give the FOMC more room to raise the short end without inverting the yield curve. They will gladly accept such opportunities. Also, I cannot imagine long rates cracking 5% without having some sort of negative psychological effect on equities, particularly interest-rate sensitive sectors such as financials and home builders. As for today's action, the homeys gave back a tad of yesterday's power move, falling about 1%.

Tomorrow we get an employment report, I will be curious to see how it is interpreted by the twisted minds of Wall Street.

Disclosure: Long NEM Calls; Long RIMM, YHOO Puts


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