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June 1, 2006

Suckers Rally I

A market sitting around waiting for an excuse to rally was finally given its catalyst via a slew of positive retail sales reports this morning. Contrary to my suspicions, Wal-Mart's sales report two days ago had no correlation on the overall condition of retail sales last month. A host of other chain stores, high-end and low-end alike, reported same-store comparables for May that exceeded expectation. The largest sales jumps were posted by J.C. Penney, Nordstrom, and Guess, each with double-digit gains.

The news sparked what I believe will eventually be classified as the first vicious counter-rally of the resumption of Papa Bear. The S&P 500 tacked on about 1.2% while the Nasdaq 100 gained whopping 2.4% with winners like Apple Computer (up 4%), retailer Bed, Bath & Beyond (up 2.8%), and Cisco (up 4.3%). Even miners performed well, losing only about a half percent in the face of 2% and 5% bashings of gold and silver, respectively.

These rallies are rarely of one-day duration, so I will be looking for another day or two of sharp gains before pulling the trigger on some shorts. Unfortunately, two of my favorite plays to which I have been hoping to add at higher prices, Intel and SanDisk, were both down today, though I saw no particular news holding them back. I say 'unfortunately' with tongue-in-cheek because one cannot be too upset about short positions performing well on a 2% up day. I also continue to keep a close eye on Building Materials Holding, another favorite short play of mine for which I currently have no position. Those shares were up less than 1% today. Although I would like them to move higher, I will re-enter my positions when I sense psychology shifting again, regardless of price.

As I wrote a few posts back, the most obvious play on current psychology, which is dominated by speculation over Fed policy, is to short equities. Should people continue to expect a hawkish Fed, they will sell stocks. Should some crises force the Fed to show their anti-deflationary propensities sooner rather than later, either the crisis itself or an exodus from dollar-denominated assets will cause people to sell stocks. They lose either way. The former scenario will also continue to put pressure on commodity prices... which is desired by the Fed... but the latter scenario will cause commodities to go wild. That game is on its way, but is still a few months out.

Disclosure: Short INTC, SNDK; Long INTC, SNDK Puts

 

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