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Hump Day Hop Scotch


What Hump?


Since it costs a lot to win
And even more to lose
You and me bound to spend some time
Wond'rin' what to choose.

(Grateful Dead)

I've been doing some heavy noodling on the state of the tape and my thoughts on '06. While I've given a respectful nod to the potential for a strong first half, I'll offer that risk is increasing as we find our way. My positioning of choice, for the time being, is positive gamma (long premium) while 'trading around' some 'core' positions in energy, metals, pharma, financials and select tech situations. I sense an uptick in volatility coming as some steam is let out of the long-standing compression.

I suppose I'm not alone...

Miller Tabak & Company Technical analyst Phil Roth and Merrill Lynch equity strategist Richard Bernstein are calling for increased volatility in the markets, partly driven by expectations the Fed will continue to raise rates for a while. And in their opinion, bigger swings in the market will tilt the tape towards Red Dye. Their comments were made in the context of the fact the S&P 500 has not had a 2% move up or down since 2003.

Minyan Mailbag

"Toddo- I have not finished my work on this yet and I may be a bit punchy but it looks like one COULD say we've entered the 5th wave up already in this breakout attempt on the Dow (giving us a target to take out the old DJIA high of 11,750). What is your view on this? I note that M3 creation has been explosive since October. Minyan T"


COULD this be the case? Yes, although I don't believe its a "linear" discussion. Multiple variables (fundies, technicals, structural, psychology) and time horizons (cycles, phases, trends, nuances) shape the tape from day to day. And, as John and I discussed last night at Succofest, the imbalances continue to percolate under a seemingly calm surface. That doesn't mean we can't wave higher (see 2003), it simply means we must remain conscious that no reward arrives sans risk.

The 'silver lining' of compressed volatility is that it offers both Hoofy and Boo an opportunity to craft an advantageous risk profile. Hoofy might look for 'stock replacements' (with calls) or married puts (against long stock, effectively creating a synthetic call). Boo, with an eye over his shoulder looking for his 'tail' event, can take some downside specs at historically cheap vols. Keep in mind that if any of their critter friends don't fully grasp the nuances of the derivative market, they should avoid it altogether. Alotta professionals await retail flow daily and make a nice living taking the other side of the trade.

To answer your question a bit more succinctly, the upside certainly has a place in the probability spectrum. Brian Reynolds and Snoop Tone's work continues to paint a constructive '06 picture and they've earned my respect over the course of time (and through bull and bear tapes). Our task at hand is to position ourselves consistent with our view but remain flexible and disciplined as the script unfolds. Easier said than done, of course, but that's why we're here.

Some Random Hump Day Noodlin'...

  • Will earnings matter? Alcoa pooped yesterday and Dupont messed the bed this morning. Two stocks do not a trend make, we know, but the trick to the upcoming trade will be a function of where fundies sit on the trading totem pole. If "psychology" and the "structural" metrics trump the news flow (read: investors look through these numbers with an eye on Big Ben and the end of the rate hike cycle), they could shape more motion (sector rotation) than movement (in the broader averages).

  • I'll double dip because I think he's that sharp. "There is no internet, there are no cable channels. There are digital networks--input, output. that's it." Kevin Wassong, January 10, 2006

  • Expect to hear a chorus of "can't get 'em down" after Boo couldn't turn the Tuesday screws. Tells include market breadth (single best intraday tell), the piggies (sitting at BKX 106), beta (semis and nets), the Russell (acne above RLX 694) and Fokker (we're watching you Fokker). Also toss S&P 1275 and NDX 1705 (former resistance/current support) on the back burner if and when we get a retest.

  • Emerging themes crystallizing in my keppe for 2006? Consolidation in the metal/energy industries, diversification away from dollar denominated assets and "foreigner to foreigner" transactions.

  • Reality Check: Fannie Mae is still a smoking gun. It won't matter till it does--and when it does, it will matter to us all.

  • As we watch the drillers drive to all-time highs, I continue to believe that energy will eventually capture the top-weighting flag in the S&P.

  • It's an exciting time to be a Minyan. In addition to next week's unveiling of the new and improved, we've also got a spate of great professors set to scribe their vibe. And, of course, we're edging ever-so-closer to MiM3 as we attempt to clear the (rather high and well deserved) bar set in Ojai.

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