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January 3, 2007


For about a 2-hour period this afternoon, it was fun being a bear. Equities began the New Year with their usual upside fervor. The Nasdaq was the leader, jumping about 2% while the S&P500 lingered with about a 0.75% gain. As readers know, I placed high odds on seeing weakness in the opening days of this year, and so I was skeptical of today's early gains. Just before mid-session, I sold some index futures and bought a large pile of Intel puts. The market began to weaken in what could have easily been interpreted as a pause that refreshes, but instead of bouncing, the sell-off accelerated. By mid-afternoon, this morning's buyers were chasing each other out the door. The selling culminated with a little over a hour to go, at which point the NDX had turned a 36-point gain into a 26-point loss, and the SPX had slipped 22 points from its high.

The bears, however, did not walk away unscathed. The final hour of trading saw stocks ramp straight back up, and major indices finished more or less unchanged. These large swings left the indices and many individual stocks with spinnersÂ… candlestick formations showing great indecision on the part of the market. See the charts of Applied Materials, Amazon, Broadcom, eBay, Best Buy, JC Penney, F5 Networks, Microsoft, Citigroup, and the SPX and NDX for examples. The complete list, I'm sure, is enormous. So, as much as we bears would like to put feathers in our hats for spoiling the traditional New Year's fireworks, the end result of today's action was confusion. We will learn more about the psychological effect of today's action once traders have the evening to ponder the volatility. The winners tomorrow, bulls or bears, will swing the odds greatly in their favor.

To add fuel to the fire, the FOMC minutes from the December meeting were released this afternoon and hinted that a rate cut may be further away than bulls hope. The timing of the release coincided with the acceleration of selling in equities this afternoon. Whether there is a solid connection here, I don't know. As mentioned, I had believed selling was already in the cards

Precious metals looked to provide some New Year's joy to its fans as both gold and silver sported nice gains in the early going. Then traders suffered a bout with an age-old malady: fickleness. Today's recurrence was spurred by the mid-morning release of the ISM's manufacturing report, which ticked up to 51.4 in December from November's showing of 49.5. A reading above 50 implies expansion, so suddenly recession is of no concern... again. This sign of a "robust" U.S. economy sent the dollar soaring and the metals tumbling. Of course, the Fed minutes certainly did not provide any consolation. By the end of the day, the U.S. Dollar Index held nearly a 1% gain... now bumping up against seemingly important resistance at 84... and gold and silver plunged 3% and 5%, respectively, off their highs.

Now, the dollar had been the recipient of quite a bit of negative sentiment going into year-end, so the environment was ripe for a jerk reaction should any data point contradict the naysayers. Likewise, precious metals looked vulnerable to further retreat, as had been discussed here, so these moves are hardly shocking. The question posed to metals buffs is now: does today's slump constitute a blow-off to the downside or signal that further damage is ahead of us? I am leaning toward the "further damage" camp due to the fact that PM prices closed near their lows, and silver is yet to reach its trend line, a point at which I would be more keen to see signs of reversal.

The energy complex was walloped today by the nearly $3 drop in crude oil prices. Over the weekend, I added commentary in the charts section which anticipated an impending, sharp move in the price of oil and suggested that putting on an option strangle on crude would be a profitable way to play the setup. In fact, I had every intention of participating, but unfortunately, the price of the black stuff had already slumped $2 by the time its options market opened. Anyway, energy-related equities came under very heavy pressure. The Oil Service Holders ETF was hit for 4.5%, and many of the companies on my watch list, such as Encore Acquisition, Penn West Energy Trust, and Conoco Philips, were down 5% or more. At some point these discounts will provide a wonderful buying opportunity for advocates of the bull market in energy. I am such a bull, but those of you who have perused my Market Outlook 2007 post know that I believe some crosscurrents have to be resolved before a confident purchase can be made.

Disclosure: Short INTC, FFIV, EBAY; Long INTC Puts


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