Monday, December 04, 2006

Big picture, Dec. 4, 2006

A lot happed in the past week in terms of economic news. I have been quite vocal about my bearish views on the economy due to a housing bust; however, I also realize that the stock market has been technically strong, and anything can and do happen when there is liquidity in-flows. The disconnect between those two views grew stronger last week.

First of all, let's take a look at the economic news, which were mostly negative:

In the face such negativity, the market must be said to have held up well last week. After Monday's fall, it managed to claw back on Tuesday and Wednesday. Thursday was a high volume back-and-forth battle that finished essentially flat. The Dow was off some 130 points on Friday's ISM number but staged a late, 100 pt rally to finish well off the lows, while the Nasdaq put up a valiant defense at 2400. This strength must be frustrating to the bears as what they've saying about the economy is being proven true.

There were several intraday occasions when V-shaped sharp rallies came out of the blue to stem market declines. At least on Tuesday and Friday that I could see. Many observers linked them to large buy orders of index futures in Chicago (where giant leverage is possible, arbitragers in turn buy the stocks). Many have chalked it up to the market supporting action of the PPT or the like. My philosophy has always been to view the market action as is and not to subscribe or discount the conspiracy theories. For now I would characterize this market as "topping" but not yet broken down. I'm keep a close eye on the retail sector to see if the consumers are finally throwing the towel (or like Wile E. coyote, taking a couple more steps in mid air.)

I did make a few stabs at shorting some mortgage lenders, but were stopped out quickly. As long I keep the stops tight, I 'm happy to continue doing that. Plus, I was emboldened by the gains in the PMs.

Speaking of PMs, they were the only part of the market that "made sense" last week. The USD continued to slide since Black Friday. I hope readers heeded my words on PMs then as HUI put in a clear break out on the weekly chart. It's too early to put an upside target on this move, but if this is the long anticipated wave 3 of III (in Elliot wave parlance), it will be quite breath taking and I will keep adding on dips and sell only to keep my allocation in check.

My current stance: long gold/oil, looking to add some food/water, maintaining a tiny short exposure and ready to add if the market breaks down.

Not investment advice, please do your own due diligence. Good Luck and be safe.