Sector Rotation?

Some interesting charts out there - if I had shorter time frames (i.e. hedge fund), I'd be jumping out of these commodity names (which despite my buying today are still prone for further sell offs) and looking at some of these names for a week or so. It is interesting to watch the sector rotation which in the past has usually lasted for 5-8 days. A whole lot of retailers are peaking their head over key resistance points on this rally... all it takes is hope or a soft weekly job claims number, and people are ready to rush in.

The bigger problem for this market now is, as I've said the past week, I do expect the dollar to rally which would in theory hurt all the groups that have led the market up (leadership groups). Greg Ip, who is a Wall Street Journal reporter who the Federal Reserve seems to use as a mouthpiece is indicating the same thing in today's paper... last rate cut for you people and then we are done.

• The Federal Reserve is likely to cut its short-term interest rate by a quarter of a percentage point next week -- but then may be ready for a breather.
• But others are concerned a cut could contribute to inflationary pressure with little benefit for growth. That means the option of standing pat will likely also be on the table. If it does cut rates, the Fed could signal in the statement accompanying the decision an inclination to pause and assess the impact of its cuts, which have lowered the federal-funds rate to 2.25% from 5.25% since last year.

Now this is something I've been saying for a few weeks; and again the spin on TV will be "See, we told you the Fed cares about inflation!" No, if they did care - they would of not of cut rates so severely or be flooding the system with money. They have no easy choice - on one side US deflation of assets by a financial system run amuck by greed, lack of regulation, and ... greed. On the other, inflationary pressure. They have chosen the path that helps those who have their ear - not that they are not an independent body completely immune to politicial pressure ;). So the middle and lower class are sacrificed with the most regressive tax out there (inflation) but we hope to keep inflating the system with paper money. That's how Uncle Alan did it and it created 2 bubbles - so we are just doing the same path. Now we are helping build another bubble (this time global in nature) but as long as the upper 0.5% in the US are saved, it's all good. Deflation hurts the upper 0.5%, whereas inflation hurts the other 99.5%. So you know which path they chose. And why.

So if that reversal in the dollar happens and even if the market goes sideways, money would in the near term flow out of commodities (we can hear about the "commodities are dead" trade again for a few weeks) and then I am scratching my head as to where the money will GO. The obvious candidates are the one that would make no sense from an economic point of view, the "early cycle" plays. But sense never is an impediment to traders who act like robots "dollar down, buy commodities.... dollar up buy retailers, financials, homebuilders". So hence why I am looking through some charts and seeing some stocks already anticipating it. (case in point, Pulte Homes (PHM) reported a complete disaster last night, even by standards of homebuilders, new home sales reported today at 16 year low, and the stock is up 6%. Nice!)

In the past, I did not partake in this nonsense but some of my recent purchases (not a huge part of portfolio) are now geared for this scenario although it would still definitely be a time of underperformance ... aside from Walmart (WMT) here are some charts (below) taking off in the "recovery is coming any moment now, and the dollar strength means we need to find a new home for our trillions of hedge fund money" thinking. Again, if I were a hedge fund with a shorter time frame I'd be front running these folks and do the same thing, but since this is a more conservative, longer term portfolio / nature of the fund, if the above scenario plays out, we'll be taking some near term hits as money flows AWAY from our type of stocks and INTO the "I have a dream. I have a dream that malls will be packed, home construction will boom, and restaurants will be flowing with humans" trade. This is the main reason, that while I lifted up the allocation in my commodity type positions today from the lowest they've been in a long time, this is simply taking me back to where I was a few weeks ago; it is not a true overweight exposure at this time. I won't be making much larger moves into such names because they could work against me shortly - we'll see next Wednesday how the market reacts and if the "rotation" is truly on.

Again, these are the "breakouts", but I see a lot of retailers and even a few restaurants now peaking their head over resistance and looking like they want to "come out and play" in the new bull market.... I expect it to be relatively short lived, but it could last days, or weeks. I see the same in a few financials as well... again, if the Kool Aid is flowing hard enough, *these* are the groups that could be the best performers of the 2nd quarter... which would be ironic. But should surprise no one if that scenario did play out.

I am continuing to bleed off Ultrashort Financial (SKF), Ultrashort Real Estate (SRS), Ultrashort Consumer Services (SCC) - in anticipation of this move

Long the 3 Ultrashorts named in this entry in fund; no personal positions