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February 14, 2007

Valentine’s Day Bear Massacre

The bulls wasted no time this morning showing they are still in control of this market as traders seized on Bernanke's comments that lower oil prices will mitigate inflation concerns. Major indices gapped higher and never looked back. In less than an hour, the SPX doubled up on yesterday's gain, marking new multi-year highs. The NDX displayed a vertical leap to shame the best NBA players, popping 1.5% in 45 minutes. In a complete mockery of the bear case, one of the strongest groups in the early part of the session was home builders. The SPDR Homebuilder ETF gained 1.6% in the first hour, and the gains were lead by DR Horton, KB Home, and Beazer... two of which have their headquarters within five miles of my home.

Bernanke's comments opened the door for a move toward rate cuts, and precious metals traders were not blind to the implications. Gold surged ahead one percent, and silver gained nearly two. Mining shares gained in tandem, lead by Silver Wheaton and Compania de Minas Buenaventura, a partner of Newmont Mining in Peru.

If the bears are to take anything from the early 2007 action, it is the striking similarity between the price action as compared to the beginning of 2006:

stock chart

The market will not make things easy for traders by simply following last year's blue print. If we are to see a big sell-off, it will either come very soon or after the market fakes out both camps by soaring to new highs. While I do believe serious downside action is inevitable, today's romp threw a great deal of uncertainty into my feel on timing. For now, I will twiddle my thumbs and wait to see if the NDX can gain a close above 1825.

Disclosure: Long SLW; Long NEM Calls


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