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June 14, 2006

The Scent of a Rally

Any trader who tried to act a part in the market's recent daily script was feeling the comfort of familiarity until it came time for the grand finale. Instead of a slump into the lows of the day, stock indices popped almost a percent in the final hour. As the session progressed, it seemed like the bulls had a bit more pull than they have in recent days... or perhaps it was just less resistance... and so I lightened up on my shorts as the day wore on. I would postulate that we'll see a bit more buying early tomorrow, but how far the move goes is anyone's guess. I just hope to be clever enough to recognize when it ends.

Goldman Sachs handed out favors today in the form of upgrades on a number of stocks, not the least of which was Intel. Their kind words sent INTC shares up 3.5%, driven, no doubt, by the sheepish flock of Intel fans who have been reticent to step back into the water until someone told them it was okay. These people will get burned. Intel's troubles are far from over, and despite their dismal performance over the last 11 months, I firmly believe there is more downside to come. Nevertheless, a number of factors, including the aforementioned sniff of a rally, kept me from increasing my short position on INTC today, but I will be looking for a point to do so.

Goldman also gave a nod to SanDisk, a company whose future I described in the latest Q&A section as being more troubled than that of Intel. Both companies are facing a massive inventory glut in an expanding capacity environment. Throw in a likely consumer recession, and you can understand why I'm so giddy about shorting the pair. Because I covered my SNDK short yesterday, along with one of my sets of puts, I decided to take advantage of today's pop to add part of the put position back on. The move may turn out to be premature, but I felt underexposed to the SanDisk play. Besides, I could turn out to be conspicuously wrong about an imminent rally.

Metals took a breather from their recent and furious sell-off. They even attempted a rebound in the early going, but were knocked back down by traders who were happy to take any price that wasn't yesterday's bottom. I think we'll see more attempts to the upside over the next few days and weeks... some successful, some not... but more or less, the bottoms are likely to be in. The net result of the next few months may be nil, though. I don't think any serious attempt at new highs will be made until it's clear that the Fed is not only done with rate hikes, but contemplating cuts.

Disclosure: Short INTC, Long INTC, SNDK Puts


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