Rev Shark: New Themes
12/07/2009 8:04 AM
Instead of seeing the rug being pulled from under us, we can learn to dance on a shifting carpet.
-- Thomas Crum
We had some interesting action on Friday, and now the big question is whether we might see some new market themes emerge. Three things of note occurred on Friday.
First, a much-better-than-expected jobs report causes a sharp gap up. Many bears question the validity of some of these numbers, but there is no question that the headline numbers were above expectations. We jumped sharply higher initially but sold off the rest of the day, which raises the concern that maybe the market has already discounted this positive. When the market fails to go higher on positive news, it's often a warning sign that we are near a turning point.
The second major thing that occurred Friday was that the dollar rallied sharply. The better-than-expected jobs news increases the chances the Fed will start raising interest rates sooner, which strengthens the dollar. The most obvious evidence of the rise in the dollar was a sharp drop in gold, which has been enjoying a parabolic rise for several months as the dollar fell steadily. Oil and commodity stocks also fell on the stronger dollar, but we did see some signs of rotation into technology names as investors looked for stocks less sensitive to the dollar.
The third thing of interest on Friday was Bank of America's (BAC) secondary offering, which was done to raise cash to repay the TARP loans. News that indexers had to buy a large amount of BAC shares helped to drive it up for most of the day, which may have pressured other stocks in the major indices that had to be sold down slightly due to the increased capitalization of Bank of America. Overall financials were very mixed following the Bank of America news, and there is some disappointment that they did not act better.
So will these themes develop further? The market's very strong inverse correlation with the dollar is the most important thing to watch. There is talk that the carry trade, where investors borrow funds at very low rates to invest elsewhere, may shift back to the yen as the dollar strengthens. If the dollar does indeed start to trend upward, it is going to be very tough going for oil, gold, agriculture, commodities and other resources stocks.
Financials have led the market for much of the rally since the March lows, and their failure to rally better on news that BAC is capable of raising capital to repay TARP is worrisome. This market needs this group to continue to show signs of recovery to keep the uptrend in pace.
One of the biggest negatives about the market lately has been the narrowness of the strength. Small-caps have underperformed significantly, while a small group of big-cap technology stocks like Amazon (AMZN), Priceline (PCLN), Apple (AAPL) and Google (GOOG) have kept the major indices elevated. We have had some very frothy speculation in some China names, but overall there is very little leadership in this market.
We have a lot of crosscurrents out there right now, and we're seeing some very confused action. We need to watch the sector action very careful to see what new themes may develop. If the dollar continues to reverse its downtrend, it is going to be very chaotic as market players reposition. Technology stocks may be the way to go if things do continue to shift, and I'll be focusing on them.
We have a slightly weak open shaping but overall it is quiet.
No positions.
