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January 18, 2007

Slaughtered Lam

The bulls may be gleaming over a series of new highs in the major indices this year, but in my eyes, 2007 is shaping up for trouble. Apple and Lam Research spooked traders with their earnings calls, sending their respective shares down 7% and 15%. Lam and Apple seemed to have opened people's eyes to the problems of overcapacity in chipland because the news was not treated as company-specific for a change. The NDX sank a whopping 2%, and the capitulative run that began a couple weeks ago appears to be over:

stock chart

Perhaps the NDX will follow the same pattern of behavior as Research in Motion:

stock chart

All the excitement in the tech arena today seemed to overshadow the CPI, which showed consumer inflation a bit hotter than comfortable. The Fed is rapidly falling into its self-imposed trap between high inflation and a cooling economy. Metals sank about a percent today, but it is impossible to say how much of this move was related to the CPI report. The action sent miners about 2% lower. I noted a few days ago that the recent bounce in mining shares was accompanied by paltry volume. Volume spiked along with today's drop, so the waters do not yet feel safe. That said, a bounce in oil, which I think is on the horizon, may help support precious metals in the near term.

Despite today's equity bashing, intraday indicators did not drop into oversold territory, so there appears to be plenty of room to flex in either direction tomorrow. The market's reaction to reports from IBM, Xilinx, and Merrill Lynch should be very educational.

Disclosure: Short RIMM; Long XLNX, MER Puts


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