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December 18, 2006


The way to trade the market in recent days has been to fade the open, and today was no exception. Stocks popped higher in the first half hour, before starting a slow descent. Then for no obvious reason, equities came under aggressive selling with about an hour and a half left in the session. The action was particularly heavy in the Nasdaq where the NDX found itself more than one percent lower. Any number of catalysts could be cited, such as the $15+ drop in Google shares, unwinding after options expiration, or simply end-of-year antics. It is, of course, easy to read too much into the action this time of year. Nevertheless, given the mediocre decline in the S&P 500, it is not likely the selling seen in tech stocks is particularly significant. When this market breaks, everything will break together.

Silver took another thumping today, declining by about 40c and bringing its 2-day loss to over 10%. Given the 30% rise since early October, I do not think this pullback is reason for major concern, but rather an opportunity to add to positions if one has the resources allocated to do so. Severe volatility is to be expected during this phase of silver's journey. While I have not yet pulled the trigger, I do intend to add to my silver holdings during this decline. Apart from futures contracts, my usual prey is Pan American Silver, which I intend to own again, but I am also stalking Silver Wheaton due to this beautiful ascending triangle pattern:

stock chart

Oil drained some wealth out of the pockets of energy bulls with about a dollar drop. Oil service shares were hit hardÂ… to the tune of about 3.6%. As is the case with silver, I believe these pullbacks are just bumps in the road. Despite solid prospects of recession in the U.S., the bullish case for energy is strong. For one thing, I do not believe that Asia's economies are as susceptible to U.S. recessions as they have been in the past. Energy demand can continue to grow strongly even as this country pulls back. My favorite energy play, Encore Acquisition, found itself 6% less expensive today. I am also eyeing Penn West Energy in order to capture a good management team and a hefty dividend.

The last two weeks of 2005 saw the year end with a moderate decline in equity prices, followed by an explosive rally in the first week of the year. Bulls have that script in their back pockets for 2007, and I know bears are very, very concerned about such a scenario. Perhaps the way the market fools the most people is by swooning from Day One 2007. Just a thought... I have not formulated an expectation just yet.

Disclosure: None


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