Stare Down at the O.K. Corral 9-26-05

Good Morning

Gold and Oil are trading lower this morning and Overseas markets ramped nicely thanks to the big windbag called Hurricane Rita. U.S. Futures were higher most of the morning but enthusiasm was tempered to some degree. Existing Home sales came out at 10:00am with a larger than expected number of 7.29 million versus 7.11 million consensus. Key tell stocks are: Palm (PALM) which is unveiling a new device this morning, KLA-Tencore (KLAC) was upgraded to buy at Merrill Lynch, Valero (VLO) reported damage at their refineries in Texas due to Rita, and Charles Schwab (SCH) was downgraded at BofA to Neutral from Buy.

The fact that the stock market is not blasting off this morning is a function of skepticism that still exists. Most traders are aware that Thursday's and Friday's rally may have somewhat factored in Rita being significantly less devastating than expected. Since traders seem weary of each other as to who might be the first to sell the good news, the stock market is currently lacking rocket ship propellants. We find this stare down interesting. Somebody needs to make the first move, which will ignite others into action.

Keep in mind the precarious position of the stock market is one in which volatility may be more extreme than we have witnessed recently. While it is true that the market is oversold, it does need to do a little more work on the downside before the "mother of all bottoms" is put in. Another retest of last week's lows with positive divergences among the internals would be just the trick.

However, despite the downside work that is still necessary, the oversold condition of the market along with the overanxious Bulls can certainly power a quick but impressive rally once it gets started. We will be closely watching the internals i.e. Semiconductors, Small Caps, overall Breadth, and Volume for signs of buoyancy. The end of quarter shenanigans should also keep a bid under the market.

All in all, expect some fireworks to the upside if the Bears cannot get the market down by tomorrow afternoon.

Good Trading

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