Steady As She Goes

The rally in financials continues this morning while the sell off in commodities continues.  I’m still suspicious of this rally but this is the most conviction we’ve seen in this rotation all year long.  From a helicopter view, it does make sense.  Commodities were overextended and financials were treated as if they were going out of business.  The Treasury stepped in to bail out Freddie Mac & Fannie Mae and then the better than expected earnings from 4 big money center banks.  That set the stage for a huge rally.  As I’ve said, that money going into financials wasn’t new money, but money coming out of the commodities and global growth stocks.  The commodity index is down about 12% since its high in early July.  Meanwhile, financial are up 35% just in the last 5-6 trading sessions.  Amazing. 

I continue to analyze the rally and it is not impressive.  But, that doesn’t mean it can’t keep going for a while.  In fact, bear market rallies are sometimes the strongest.  That’s what makes it so difficult.  You really feel as though the worst is over and then down we go.  Look back at your charts from 2000-2003 where we had several strong rallies only to eventually fail.

So, our strategy has to continue to be cash, shorts (added some in the past few days), financials, global growth, etc.  You can’t bet too much on any one area or any one strategy.  Otherwise, you’ll get burned.  Just look at Costco this morning.  Costco is down 12% this morning after reporting weaker earnings.  This is a “recession proof” stock that a lot of big names like Tobin Smith love right now.  And, the stock made sense.  But, down they go.  Then, you look at health care.  It makes sense but Gilead Sciences fell 10% on Friday.  So, the point is to be careful and make smaller moves right now.

There is also some contradiction out there.  The Fed is printing more money which is inflationary so interest rates have gone up after the “bailout”.  But, at the same time, gold is selling off.  Go figure.  I remain long in gold and will stay long until the uptrend is broken.

Also, don’t forget the pairs trade.  This market begs for this strategy which is long the good stocks in a sector and short the bad ones. 

For now, I’m observing and staying fairly neutral.

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