Marketview: Reflation Trade or Something Else

• Posted by DynamicHedge
• on July 1st, 2012

A wild week was capped off with the EU Summit announcement of plans to establish a single banking authority run by the ECB and the recapitalization of weaker banks (Spanish).  This news was interpreted as extremely positive by world markets with a gap-and-go rally Friday.  There remains an ongoing debate as to whether these plans are enough to represent a lasting solution or if this is just more “plans for plans” committee jockeying to goose the tape.  I see mostly positive signalling on the news and a market poised to move higher but there are still some notable areas awaiting confirmation.

Market rotation seemed focused on the reflation aspect of the news with capital allocation focused on energy and basic materials sectors.  This is not entirely abnormal this early in a bullish run but not the healthiest of conditions for a sustained rally.  On the plus side the market breadth was very impressive and the $TRAN ripped higher and is acting very strong.  Most metrics of risk, from Spanish and Italian yields, the St. Louis Financial Stress Index (STLFSI), and the $VIX are moving lower.

The lack of funds coming out of bonds is a concern as long-dated treasuries were basically unchanged on the week.  The Nasdaq 100 lagged the other major indexes and the $XLK was the worst performing sector with notable absence in leadership from $AAPL.  Our primary MAMO indicator is still skewing negative, even though the more sensitive version (MAMOX) went positive last week.  The MAMO indicator will not turn positive until bonds get much weaker.

I didn’t anticipate anything remotely this positive coming out of the Euro Zone so fast.  Once the news was out, the one thing I did know was that Friday was NOT a high probability fade.  Going forward, if we can get even a modest amount of confirmation in the areas of concerns mentioned above, this market reflates and could move much higher.  If not, the haters get proved right and the “plan for a plan” will prove to be just that.  I guess summer trading might not be so slow after all.

Winners: $OXY, $APC, $APA, $ORCL, $FCX, $MON, $GE, $GD

Losers: $SBUX, $HPQ, $INTC, $MA, $V, $DOW, $F, $SO

Note: I’ve been noticing some very positive activity on stocks with exposure to the defense sector.  This is worth monitoring as these stocks tend to trend for a long time.  Watch $LMT, $RTN, $GD, $HON

 

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