Chop and Shop 10-18-05

Good Afternoon.

The PPI came in a little hotter than expected throwing more inflation fear into the mixing bowl. However, traders are more likely focused on earnings. Last night we mentioned that it would be important for Rambus (RMBS) which reported solid earnings to catch momentum. We also said that Novellus' (NVLS) weak report needs to attract some bargain hunters. Today's action indicates that RMBS has stepped up to the plate and the jury is still out on NVLS.

The stock market internals today seem rather poor. If it were not for Intel (INTC) which has caught a bid in anticipation of tonight's report, the selling pressure in the market would likely be much heavier. The breadth is bad on the NASDAQ at 11:16 advancers to decliners and 11:19 on the NYSE. We are not surprised by this action as the choppiness should be expected for at least a few more days. However, should the market show negative reaction to earnings reports combined with continued heaviness in the Semiconductor sector, the near-term balance might indeed tip in the favor of the Bears.

How concerned are we should this materialize? From a traders standpoint we would likely lighten up our exposure to around 60% net long from our current 90%. Our intention would be to buy back the dips due to the fact that our overall Bullish thesis still remains intact. The fact that the market is oversold and clearly positive divergences have emerged, we would expect that the pullbacks would not fall into the abyss. Since we have been wearing an investors hat lately due to our intermediate and longer-term Bullish view we would be reluctant to bring our exposure down below 60% net long.

Our intraday forecast is for late afternoon strength. This mornings little shakeout has further set the stage for the dip buyers.

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