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January 3, 2006

Two O’Clock Derby

After a pop at the open, stocks quickly gave up ground and were down as much as ¾% a little more than an hour into trading, no doubt inducing frenetic fingernail biting on the part of many bulls. Buyers then stepped in, and the indices hacked their way back to neutral by early afternoon. Then, at exactly 2:00 ET, as if someone rang a dinner bell for bullish fund managers, a feeding frenzy began in the equity markets, jolting stocks upwards. They never looked back. There was nary a sector left out of the madness, unless you consider "2005 dogs" a sector of its own. Last year's under-performers, including GM, Wal-Mart, Juniper, and the GSEs, were left feeling red.

In the midst of all this movement, we saw Google start the new year with fireworks. Its shares tacked on $20 (the shares remain under a short signal in my trading model). Lest you think we are drawing closer to the "short Google, long gold" trade I mocked in November, which would require parity between the price of a Google share and an ounce of gold, take a glance at the commodities scoreboard. Gold tacked on a whopping $13, no doubt fueled in part by a sharp drop in the dollar. Silver also did well, soaring 32c to well above $9 per ounce. Hmmm... did anyone expect metals to go vertical here?

Today's action suggests that probability favors a follow-thru to the upside, at least for a few days. However, bulls and bears alike should be exceedingly skeptical based on the aforementioned huge drop in the dollar. As regulars of The DOCument have often been reminded, the dollar has been leading equity markets fairly reliably for better than a year now, and if today's dollar drop is confirmed by further weakness, equity markets may soon reverse and begin the big spill I've been anticipating.

For my part of the frenzy, I executed my first day trade of the year: a round-tripper on Pan American Silver. PAAS seemed to be lagging the move in silver just after the open. Usually a price lag in mining shares means traders don't fully trust the move in the commodity. At times they are correct, and we will see the price of silver pull back. Other times, the metal will hold strong, and the mining shares will play catch-up. Given the weakness in the dollar, I gambled that PAAS would play catch-up, and it did. My profit wasn't huge ($250), but it isn't bad for 16 minutes of early-morning work.

Mining shares, in fact, continued to explode along with the market. PAAS and Newmont Mining ended 6% higher. A few short weeks ago, traders were discontent with Newmont's underperformance of gold, yet we suddenly see NEM 20% higher. Perhaps we should be wary of a new speculative premium being pumped into miner shares. I haven't made up my mind about that, yet.

No doubt, the big boys were building positions today, placing their bets for 2006. It is no surprise that the chips came down squarely on the 2005 winners: metals, energy, and large-cap tech stocks. But we cannot extrapolate the whole year based on Day One. Some of the bets will pay off. Others will not. My expectations on each sector have not changed, and I intend to look for opportunities to place my own bets in the midst of all this shuffling.

Disclosure: Long WMT Puts; Long PAAS, NEM Calls; Short FRE


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