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October 16, 2006

Status Quo

Not much seems to have changed since my pre-vacation post of 12 days ago. The bears are still stuck in a vice, screws slowly tightening. The SPX is still exiting my screen to the upper right, and my puts on the index are set to expire worthless this Friday. Given my belief that this rally will end suddenly and violently, I will have no qualms about purchasing December puts and resuming my thumb twiddling.

How far this rally can be sustained will be greatly influenced by interpretations of the earnings reports due out over the next 2-3 weeks. Over the next three days alone, we will hear from high-powered names like IBM, Yahoo, Intel, Google, Motorola, Bank of America, CDW, Apple, SanDisk, and eBay. Some of these reports may very well determine which of my slew of options will make tidy profits and which will expire worthless, so you can imagine I will be quite attentive. As we macro traders know all-too-keenly, just because the big picture is deteriorating does not mean a poor report will be the result this quarter. However, with patience and a solid trading strategy, the approach can be quite profitable.

In any case, equities have defied widespread expectations of a nasty September and October. I think there is a better-than-even chance that it will also defy expectations of a rosy November and December. The last two months of the year have been recently cast in a "no-lose" light as funds ramp the tape to earn their year-end bonuses. It would be quite fitting for stocks to take a year-end dive since such a move would surprise the most number of people.

My portfolio was handed a nice gift on my first day of vacation when Micron Technology disappointed speculators with poor revenue guidance during their earnings report. Micron shares were drubbed to the tune of 14%, and its chart is now looking quite ugly. One by one, chip companies are confessing to overproduction and weakening demand, yet traders refuse to discount the trouble into other shares. Hope springs eternal that their darlings will manage one more quarter of deception a la Lam Research or Research in Motion.

Speaking of RIMM, I am still quite incensed by the way they handled their earnings report and downright irked that no regulatory flags were raised over the obvious manipulation of the after-hours trading environment. My vengeance will be manifested by the massive short position I plan to lay down on this one once the momentum buzzards have had their fill. The shares fell about three bucks today, but the low volume was unconvincing.

I was pleased to watch silver rally a buck during my jaunt abroad. My futures purchase of two weeks ago now seems very well-timed. In fact, while contemplating the action over the weekend, I came to the conclusion that a big move is likely to be right in front of us, so I added to my position last night. As you can surmise, I found today's 2% move to be quite gratifying. Gold also popped a percent, but despite the strength in metals, miners had a hard time getting going. Given the gap moves of Friday, one would think that mining shares would capitalize on continued strength in metals and further their moves, but they instead found themselves down a percent by midday. The larger players, such as Newmont Mining and Pan American Silver, lead the way lower with one and two percent declines, respectively. By the end of the session, though, miners were sporting half-percent gains. I view this recovery as an important sign of strength and believe that the worst of the summer spill is behind us.

Disclosure: Long PAAS, NEM; Long NEM Calls; Short NEM Puts; Short INTC, MU, RIMM; Long YHOO, INTC, MOT, BAC, CDWC, SNDK, LRCX, RIMM Puts;


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