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January 25, 2005

Wishful Thinking - A Malady

Here are some headlines posted on various financial Web sites today:

Stocks Power Up (TheStreet.com)
Handsome profits spark a solid rally (CNBC)
Rally mode -- at last (CNN Money)

If this doesn’t all sound like wishful thinking to you, maybe you’re suffering from the same malady. Today’s pop looks a lot like a bear rally… one of those sharp up days that result from stifled buying pressure in the middle of a longer sell-off. Such buying pressure can occur as some people take profits in shorts, or by an amassed dose of wishful thinking, and can be triggered by glimmers of good news.

Today’s good news was posted by Johnson & Johnson and DuPont, prompting 3.5% and 2% rallies in their shares, respectively. Generally, the markets followed suit, but here’s where I see the cracks…

Google and eBay, two of the speculative stocks that have lead our reflation since 2003, were down today, 2-3% a piece, despite the strong rally. They were joined in their slump by XM Satellite Radio (down 1.5%) and Best Buy (down 2%), among others. If this were a true turning point, the speculative stocks would be leading the way.

Also, our housing bellwethers, the GSEs called Fannie Mae and Freddie Mac, were off over 1% today. The housing bubble is one of the three bubbles identified in my money supply and inflation article, and I am keeping a close eye for signs of an accelerated deflation of these bubbles. The recent 10% drops in the GSEs may be a precursor to our long-expected break in the housing stocks themselves. It will be interesting to see how it plays out.

In other news, Johnson & Johnson’s gift today set a fire under drug shares. Pfizer, Merck, and Schering-Plough were all up one to four percent. I have discussed Pfizer extensively in previous articles. It remains to be seen if today will mark a turning point for the drug sector or if they are just participating in the snap up, then continue to decline. We are hoping for the latter so we can find favorable entry points into the shares.

Author’s Disclosure: Short XMSR

 

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