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June 21, 2006

Sticking to the Plan

The game plan I laid out earlier this week called for the market to rally enough to convince bulls that the May/June sell-off was just another buyable dip while disparaging bears enough to make them believe they've been had once again. Today's action filled a giant piece of that plan. Late-day dip aside, stocks saw the expected follow-thru rally with all major indices up sharply. I don't really know how much steam is left in this move, so I resisted the urge to take on more short positions. Besides, next Friday brings not only the end of the second quarter, but a new round of baseless banter from the FOMC. Between mutual fund window dressing and the eternally springing hope that the Fed will back off, I just don't see much impetus for the market to weaken significantly between now and then.

Post-EOQ will be a whole different ball game. Everything will hinge on sentiment on the heels of the Fed meeting. It is possible that the Fed will provide easy enough language to spark a violent short-covering rally, which will then be followed by a plummet to new lows. On the other hand, maybe the Fed will simply put an end to the rally by continuing to promote inflation fears. Either way, I think the safe play for bears is to wait until next week's drama is out of the way before getting aggressive.

Just about any sector beaten down recently put in a strong performance in today's action. Mining shares soared 4%, helped by a solid day in the metals. Home builders enjoyed a 3% bounce with the strongest performances coming from Toll and KB Home. Building Materials Holding even withstood a downgrade from SunTrust Securities. Though the shares were down more than 5% in the opening minutes, BMHC recovered to finish the day up more than 4%. Today's speculative fervor was exemplified, however, by Google's $15 romp back into $400 territory.

Overall, today's session reinforces my conviction that higher prices near-term is the path that will set up the biggest fool's game. With the exception of my Intel positions, the short positions I still hold are small and are designed to keep me in the game should my near-term view prove incorrect.

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


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