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Beast of Burden


Intel and Microsoft headline a huge parade after the close!


Good morning and welcome back to the wild ride. The moody Minx rode the manic Monday higher and, in the process, regained the lost ground from Friday's failure. It was an impressive showing by the bountiful bovine and when the final bell tolled, Hoofy was feeling pretty good about his horny gore. Will his optimism prove profitable as we edge through earnings? Or can Boo blast the bulls and take back the tape? It's a new day in the fray and the games are set to begin, so roll up those sleeves and let's punch this doggie!

We spoke yesterday about both sides of the tape and, as we fire up our systems this morning, the great debate continues to rage. Sure the S&P and Dow edged through their 200-day moving averages, but are false (and further) breakouts a necessary precursor to a new leg lower? Yeah, Fannie Mae (FNM:NYSE) and the banks reported solid earnings, but isn't their bear case predicated on what will happen (rather than what has)? Yes, the animal spirits want the market higher -- but is that the very definition of a hope that needs to be sold?

And what if the bulls have been right all along?!?

There will always be two sides to every trade and a (perceived) legitimacy for each move. I can see what the bulls see: The tape has sufficiently paused and worked off the overbought condition, we've now put in our third "higher low," earnings (thus far) haven't been the disaster some had predicted and the war with Iraq has gone better than most expected. If those elements weren't in play, the market wouldn't be tickling these levels. The trick -- and this is trading in a nutshell -- is to capture the disparity between perception and reality.

Bear markets are littered with false hope and empty promises and, at the point of maximum pain, the most fervent furballs take the bait. I don't know if we've gotten there yet, but I've attempted to execute a strategy consistent with my view and consistent with the discipline that's gotten us to this point. It's certainly easier said than done and, if nothing else, this market can be extremely frustrating. As I've been apt to say, however, the mechanics of the swing are as important (if not more so) than the results of the at-bat.

Yes, the market can trade higher, the VIX can edge lower and the bullish sentiment can become more extreme. What you need to do is identify a horizon and construct a strategy that is an extension of your risk parameters and market thesis. For my part, I've chosen to use the rallies to leg into some short exposure and trade around that bias. That doesn't mean it's right for you -- and it may not prove to be right at all -- but it's my true read and you'll always get that from me.

At what point does discipline dictate a reassessment of strategy? A true grizzly will identify zones all the way up the Minxy totem pole that should offer resistance. The level to choose is purely a function of style but, for my part, I'll be eyeing S&P 905 (where the last two spikes failed). I'm not likely to boot my put options (I think volatility should be bought rather than sold), but I'll rethink my delta exposure against a backdrop of positive gamma.

First things first, we've got a truckload of earnings yet to come and we'll need to be tip top, schvitz hot and second to none (sir) as we find our way. Take a deep breath and understand that there are a lot of balls in the air and emotions in the tape. When it's all said and done and the chips fall where they may, our goal is to be in a position to prosper. The only way we're gonna get there is through hard work, deep desire and a commitment to excellence. Let's do this schvitz!

Good luck today.

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