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Thursday’s Sermon

Do not be led into temptation!

Many stocks may appear to be a bargain this week and some may well be but don’t commit yourself until we see a real broad based market move.

You may have the best and floatiest (ok, not an actual word) ship in the tub but, when the water drains out, you hit the bottom just like everyone else. After two consecutive weeks of teaser rallies that end in disaster you would think I wouldn’t need to say this but I do.

Let’s take GM for example. The stock is trading at a 30 year low and is looking very technically overbought but then there’s this: http://online.wsj.com/article/SB113582727104333651.html?mod=home_whats_news_usI’ve promised to lay off GM and let it die in peace but I see people are still buying it and I just want to make sure it is not one of my readers! The proposed FASB changes outlined in this article will bring GM’s balance sheet more in line with the real numbers I calculated way back in November when we first shorted this stock.

MSFT may look like a bargain but is still 5% above its 200 dma and RIMM is a well known accident waiting to happen. AAPL could pull back 20% and still be 20% above its 200 dma while INTC is attacking its mid point with a vengeance. All of these stocks (except Apple) had a terrible first 2 weeks of the year in ’05 so this is not the time to play the hero calling anything like a bottom as many analysts are doing.

Remember, the analysts work for people who only make money when someone buys stocks. If all they have is sellers they will run out of customers fast! That’s why everyone has been pumping the “Santa Clause Rally” all week, to no avail. Now they are changing their tune to “Big Gains in ’06” and, while I do think it can happen, I am really in show me first mode.

As I mentioned on Tuesday, I see some weakness in GS and other broker stocks spurred by poor ’05 investor returns and slowing trade but it is Goldman that will really turn the sector if it starts to fall.

The China market has turned down on real volume this week and the Nikkei is closed for New Year’s so there is a lot of money with nowhere to go today and tomorrow. If that money does not find its way into US equities in the next two days, it is very doubtful that the stocks will move any higher until they go through the painful 5% adjustment we talked about last weekend.

Gold is one place that is drawing money again, you would think people would be more timid after the last painful pullback but that was like 2 weeks ago and who remembers that far back? If we close above $520 today it will be based on US trading which will be very bullish all the way to $530+. BVN is the pick of the litter at the moment as it is under the radar but should be showing very nice growth. The $25 calls have very little premium at $4.10 (.40) and are a great way to test drive this stock. This trade is null and void the second gold crosses below $420!

The big action for the day will be in the energy sector with oil and gas inventories coming on the same day. The oil people are looking for 500K draws pretty much across the board with an increase or at least flattening in demand. The real hot number will be natural gas – if they do not get a draw of at least 150Bn cubic feet we could see a $1+ drop in gas down to $10.50 or lower.

I will be looking to short oil today and will make no trades if there are drawdowns within 20% of the above goals and, of course, strictly following the Valero rule.

Among those I will be watching are CAM, BHI, DO, NBR, OII, SU, PDS and UPL but I will not be greedy, 1-2% moves in a day will be thrilling!

Do not be tempted today – Ignore the Dow. The S&P fell below 1,268 and must go above it and close there with volume. The Nasdaq must retake 2,250 and stay there before there is anything like a recovery in effect.


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