Wednesday, August 09, 2006

Another critical juncture

Today was another atrocious reversal with higher volume. The announcement by Toll Brothers in the morning pretty much sealed the fate for the home builders. The mortgage lenders fared worse for a change: CountryWide Financial (CFC) which I shorted before, was down 8.65% on almost four times average volume, while Accredited Home Lenders (LEND) was down 17.24% on almost ten times average volume. Transports were whacked for another 3% today to close at 4162. It had an 800 pt drop in a month!

I have refrained from calling another leg down recently, waiting for more confirmation. Based on today’s action, however, I believe the rebound from June 13 is over and I expect those lows to be tested and eventually broken. I have been maintaining my position in BEARX, USPIX, UCPIX, MZZ and QID as a hedge to other long positions. The shorts in CFC and HDI were closed prematurely in hind sight (although I stand by those decisions based on risk management), but I was fortunate enough to have added to by BZH shorts last Friday and picked up some SPY puts on Monday. My plan now is to establish a net short position in the non-PM equity portion of my portfolio using inverse ETFs or shorts/puts in housing, consumer discretionary, and maybe financials.

Precious Metals
I previously noted that the current correction in HUI was taking a triangular form that might resolve to the upside after completing an ABCDE pattern. However, on August 2, HUI broke above the upper rail of that triangle (blue line in the chart below) and I picked up more shares in anticipation of the coming wave 3 of III. I annotated the chart below yesterday but hesitated to share it, as I was (and is) still coming to grips with its implications in the context of a very likely new leg down in the general stock market. As labeled in green, another thrust up equal in length to the 303-348.7 move would bring the HUI to around 390. It goes without saying that this is an extremely optimistic view. I would feel a lot more confident if the HUI were to finish above the recent high of 353.5 first. That the HUI was able to keep much of its gains today gave me some hope.

I’m still trying to fathom the significance of a diametrically opposing move in PM and SM in the directions I’m predicting. There aren’t many external events that will make the masses come to the side of gold bugs and Austrian economists. I only hope August 22 is not the one occasion precipitating such a change. Oh, sometimes what I do here seems so petty!

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