When It Shines, It's Scorching...

The MVRX (Morgan Stanley Retail Index) has rallied 10% in less than 5 trading days -- very impressive! The stock-specific retail sales data that we saw today wasn't as bad as people feared, and a few (really) beaten-down names such as Abercrombie&Fitch and AnnTaylor (ANN) are simply flying, having handily beaten expectations. This, in turn, has propelled the SPX index to what, in my humble opinion, is an overbought area of 1223-1225, from which I expect it to retreat slowly downwards, before gradually basing for one final push higher into calendar 2005 year end. The SPX index area of 1205-1207, which, when the market was a lot lower, I had identified as the "make-or-break significant overhead resistance" as far as the 4Q rally was concerned, should provide a nice little cushion for any hard market selloff. The bears spent a lot of ammunition defending that 1205-1207 level for almost a month, and when they finally surrendered it earlier this week, it was with something resembling a blood-curdling scream of defiance immediately preceding a slaughter... Or so my active imagination is replaying the situation in my head over and over again, when it comes to visualizing the type of monstrous stop-losses that must have been triggered and were quickly taken out on the way up. The bulls have roared back with a vengeance, their sentiment propped up by a series of relatively good (or not-as-bad-as-people-expected) economic releases.

I am particularly encouraged by the reaction of the SOX (the Philly Semi-Conductor Index) off its lows. Coupled with the fact that the energy sector has finally stabilized, we are starting to finally see some leadership out of the tech-laden NDX, which is what we needed for a sustained 4Q rally. As I wrote a few days back when the market was still trying to find the bottom of the barrel, so to speak, I hope no one shorted stocks such as PIR and PETC -- because, every dog has their day, and I do believe those two might just be out of the woods, price-wise -- i.e. the bad news is already out there, so that any "further confirmation of bad news would actually be *good* news". On a similar note, FDO and WMT, which I highlighted in early October as nice, safe value longs (at a time when everything else was falling out of bed), have put up quite a performance. I would exit 3/4 of the WMT long position here at $48, as the stock has closed its bearish gap from August, and I expect it to trade sideways for a while, before eventually going higher. It's all about velocity of capital -- value buyers are already in the stock and will probably stick in it for a good 1 to 2 years (and maybe 15 to 20% higher), but traders should think about exiting, because, as that nut Jim Cramer always used to say: "it's hard to resist the ring of the cashier register in this crazy market".

Last but not least, index vols have come down quite a bit, so now is the time for proactive fund managers to load up on some 6 to 9 months-maturity downside puts or put spreads in the SPX -- to protect the portfolio (relatively cheaply!) for what I think may be a challenging 2006 year. Fix the roof while it's shining!