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October 25, 2005

Warming Up to Metals

Precious metals showed strength today with gold up around $7 and silver up 14 cents. These moves come off a level above apparent support, showing greater conviction in the metals story by traders. Mining stocks like Newmont and Pan American Silver popped nicely in the morning, but for some reason sold off to their lows by the end of the day (which is when I added some PAAS calls to my holdings). Traders may be worried about how energy costs have impacted the miners' earnings, but ultimately, these stocks go up with the metals.

Equities popped nicely in the morning only to slide for most of the day. The Nasdaq had given up almost all of yesterdays gains until about quarter after three, when it staged a large push higher into the close. Volatility is definitely here to stay for a bit. It's interesting to note that volatility tends to be higher in bear markets, so this increase in volatility could be a hint as to which direction the market will finally break.

Research in Motion pressed lower today, losing over $2 for the third day in a row. It was greeted this morning by a downgrade from Citigroup (buy to hold, with a revised target price of $62), and after a couple early attempts at rallying, it flummoxed, then slid throughout the day, closing near its low. Yesterday I commented that a meaningful close below $60 may trigger a cascading sell-off. The stock spent the entire day today under $60, and closed at $57.45. The sell-off I expect may be imminent, but let's give traders a couple days to make an attempt to take it back above support. Failure to do so could make $60 the new resistance level, much like $82 has been for most of the year.

Another one of my favorite short plays reports this afternoon: F5 Networks. I don't have a strong opinion about how this quarter will turn out, but I know that either this quarter or one of the upcoming ones will reveal the difficulties it faces with pricing and competition. The stock started today by bluffing upwards about a dollar before cascading downwards to close off nearly $2 on the day. I've noticed that in recent weeks a stock's action immediately preceding an earnings release tends to be wrong. If this trend holds true, FFIV will come through this quarter and we bears will have to be a bit more patient. Also, FFIV was hit after their last release. Knowing they were going to disappoint anyway, they may have accelerated some of the bad news into last quarter's report so they could make this quarter. Let's wait and see.

Amazon also reports this evening. The stock was down moderately in regular trading, so my rule of thumb above may not apply to this one. Amazon is a "short consumer" play, as pricing pressures due to competition and delivery costs, along with a tapering growth rate, continue to dog them.

Disclosure: Short RIMM, FFIV, AMZN; Long RIMM Puts, PAAS Calls.


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