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Capture the Flag!

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Those darn Red SOX always disappoint!

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Good morning and welcome back to the crimson track. Yesterday's slide (a bumpy bear ride) left the dip shticking bulls a bit starry eyed. While the day started slow and the waters were calm, Boo then lit the fuse on an ursine time bomb. "Once my levels were broken and the clock started tickin', it all came together--my mojo was kickin'!" Will he pick up the pace of his race to disgrace or just fall (like before) on his furry bear face? It's a spankin' new session of critter obsession so suck back that 'jo and let's leave an impression!

We powered up for Monday's muck with a fairly strong feeling that we'd soon come unstuck. Something was clearly gonna give in our much discussed pennant race and as soon as Hoofy blinked (and the semis breached support), it was game on for Team Red. Like a series of dominos, the SOX broke 500 (then 495), the NDX slid through the flag formation (confirmed a sell signal) and the S&P, however begrudgingly, was pulled through its trendline. In the process, and very quietly I might add, the Dow Jones poked through its 50-day moving average (on the downside) and gave pause to the cyclical cause.

Is this time different? In other words, can the bears leverage this momentum and mount a coordinated downside effort? We noted the negative divergences (and the non-confirmation in tech) a few weeks ago and asked the very same question. The answer at the time was that the ducks were starting to quack in unison and, after yesterday's slim shady, that fowl echo is starting to resonate.

While this horse race is FAR from over--and bullish elements (including firm financials and tight corporate spreads) continue to stand out--the trap door created by the current psychology bubble is a bit spooky. Think about it for a moment--sentiment is floating near all-time highs, vols are trading near eight year lows (after a 10% pop!), speculation is rampant (bulletin board volume for the last two months has already exceeded 1999!) and the tape is considered "safe" at least--at the very least--until the election. That's a recipe (it's been a recipe) for disast, er, disappointment any way you slice it.

When was the last time Intel (INTC:NASD), Microsoft (MSFT:NASD), Dell (DELL:NASD) and Oracle (ORCL:NASD) all traded below their 200-day moving averages? The answer is simple--it's been a mighty long time. Looked at another way, over 13,000,000,000 shares of Intel traded above $30 during the last twelve months. Somebody bought that stock and if the bulls don't recapture the flag, they'll have to start teaching the Heimlich over in Matador City. Forget, for a moment, the massive bubble supply that remains at NDX 2000, 3000, 4000....we're talking recent history and fresh wounds. And, while I don't want to belabor the point, it's worth noting that the NDX trend has officially changed. Lower highs and lower lows will do that.

Now, to be fair, we ARE a stone's throw from an S&P "reaction" high and the stubbornly sticky banks stand out like a green thumb. The liquidity/low rate/tight corporate spreads tri-fecta has kept a bid to the piggies and rendered them--along with energy--a "safe haven." That scares me a bit although, admittedly, there is little in the price action to suggest that a perfect storm is on the horizon. My long term views are polar opposites for those two sectors--I think the banks are screwed while I believe energy will relatively outperform (as oil becomes scarcer)--but both are getting a tad cozy for the time being. But heck, you can take that (humble) opinion with an entire salt mine as I've been as wrong as a song on the financials.

We power up this morning to find that the Nikkei tacked on marginal gains (holding above it's bullish "reverse head and shoulder" neckline), Europe a percent lower across the board, the dollar index a tad higher and the metals pink on the inside (slightly red). The stateside futes are neither here nor there but after the fugly close on the lows, a downside probe is probable at a point. S&P 1136 is the 50-day support while S&P 1120-25 is the big board rip cord. Expect a noisy opening and then watch the breadth and financials for guidance. And think positive, Minyans--it all starts within.

Good luck today.

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