Weekly wrap-up 7-21-06

This week saw a lot of action and clowns jumping up and down on CNBC with Wednesday’s “Fed-is-done” rally. Commentators took Bernanke’s claim that the FOMC expects moderating growth to contain inflation as a confirmation that inflation is under control and the interest rate outlook is benign, a view we do not endorse. Investors may have realized that slowing growth implies slowing earnings – so although second quarter earnings have been largely in-line with and even exceeding expectations, stocks were broadly not rewarded. We wonder how many of these “Fed-is-done” rallies are left… but would not be surprised to see more and more sharp rallies as this bear market really takes hold. We saw Wednesday’s action as a short-covering rally, motivated by the fears of short-sellers of missing the next leg up, perhaps triggered by Bernanke’s new seemingly dovish stance. The fact that buyers failed to materialize, as evidenced by the various indices surrendering most of Wednesday's gains, confirmed our view. The higher-than-expected core CPI number and the growing signs that Israel plans a full-scale invasion of Lebanon were mostly ignored.

The outlook for gold and silver this week is sunny with a chance of rain. We look for rallies off forming trendlines to confirm their importance. If those rallies successfully penetrate some resistance overhead, we look to get long these metals again. If no rally is mounted, however, we expect trading down to support and possibly 200-day moving averages. If those levels are seen we will be aggressive buyers. For now we are on the sidelines.


The Nasdaq 100 crumbled some more this week as tech industry bellwethers INTC, DELL, and AMD saw their stocks trampled, countering the mid-week rally that saw a test of 1500 above. In bear markets, oversold conditions are the norm, so the low RSI does not bother us that much. Excusing sharp intermittent rallies like the one we saw on Wednesday (which we used as an opportunity to add to our short), we expect the NDX to continue disintegrating for a test of 1400, and ultimately 1300. The SOX semiconductor index hit new lows, violently. We remain short NDX, and look to add to our position on large rallies.



We noted that copper has failed to make new highs on its latest rally. It is now below its 50-day MA again, which previously provided support. The 200-day MA remains far below. Our growing bearishness on copper, coupled with the PD chart, motivates our desire to sell rallies in that stock.