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January 12, 2007

Where’s the Volume?

Precious metals lit up the scoreboards today as silver surged 50c and gold tacked on a healthy $15. The action felt very much like a lot of contained buy side pressure was being relieved, and if so, some massive short positions could get squeezed, sending prices higher. Mining shares responded with 3% gains. However, one technical aspect of this move disturbs me: the lack of volume. Glancing at charts such as Goldcorp, Newmont Mining, Pan American Silver, and Silver Wheaton, one can observe the paltry commitment made to the upside compared to the preceding down days. This red flag has kept me from increasing my positions. I suppose we'll find out soon enough whether the gains are simply a corrective bounce or the beginning of an important move, but until I see more volume, I will assume the former.

Equities behaved more or less as expected today, which is to say they went up. The Naz notched another multi-year high into its belt, while the S&P 500 bettered its 2007 high of a week ago. At some point, hopefully sooner than later, I believe we will witness a rapid spurt higher, marking an important top, followed by a quick reversal. I await the spurt in order to acquire the load of SPX puts mentioned yesterday.

AMD jolted traders this morning with a warning that fourth-quarter sales would fall short of expectations to the tune of nearly a half billion dollars. The shortfall, they said, was a result of much lower average selling prices than anticipated. In other words, a price war with Intel is severely crimping margins. A price war cannot be good for Intel, given their massive inventory build. In fact, the inventory issue may be a primary cause of the price war, and the recession that appears to be looming will only accelerate the discounts.

So traders responded in the only natural way they could: they drove INTC shares up 1%. After all, how is one to instill a sense of impending danger on speculators who are all busy watching Goldilocks prance around in her miniskirt? Intel reports Tuesday, and I think the report is liable to slap some sense into the market.

The coming shortened week promises to set the mood for the whole quarter, as most of the S&P reports. I plan to get rested and be ready for some fun action.

Disclosure: Long INTC Puts, NEM Calls


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