Thursday, July 20, 2006

Fool me once, shame on you

"..., fool me twice, shame on me", so goes the song. Since mid May, there have been two 200-point Dow rallies, both met their demise in a few quick days. So it was quite normal to cast some doubt (link here and here) upon the latest occurance on Wednesday, especially since it was once again acompanied by the now tiring expectation of the end of Fed raising rates. The doubters were vindicated today by the sight of Nasdaq giving back all of yesterday's gains, the transport dropping 200+ points and the home builders making new lows after a 5% pop yesterday. While we're on the topic of home builders, I doubt very much that the end of Fed tightening (this time, even I believe they will stop after August) will spell much relief for them. Trends in the housing market tend to have a lot of momemtum. They don't change easily. The real bomb I'm waiting for is the de-coupling of mortegage rates from the 10 yr as default risk gets properly priced in. As Buffets says, we'll see who's been swimming naked all this time.

I updated the comparison chart between the current decline in the S&P with that of September 2000. I continue to be amazed by the similarity in the rhythms of these two periods. If we stay on course, and it's a big IF, the current decline will take us below the June lows. I wouldn't recommend anyone trading based on this information, but since I haven't replenished my short exposure after closing out the puts I nibbled on some QID and MZZ (the ProShares 2x short ETFs on the Nasdac 100 and Mid caps) today.

This is not investment advice, please do your own due dilligence. Good luck and be safe!