The relentless ramp up of oil and commodities prices could be over for now, and that ultimately would be a good thing for stocks, says Citigroup Chief U.S. Strategist Tobias Levkovich.
"Is this the beginning of the unwind? My sense is yes," he said in a phone interview.
"There've been false dawns before, but structurally it should be."
Levkovich has been expecting this turn in the markets to come at mid-year for some time. "It's when you start to see the real weakness in the industrial environment," he said. One sign, he said, is deterioration in Europe, evidenced this week with the poor reading on German business confidence. He made these comments to me yesterday before oil fell through $134. (It finished today under $130 per barrel on the NYMEX)
"We've been saying it would start to shift mid-year..The investor would start to see the problems in the industrial commodities energy trade," he said.
Levkovich said it would not be a positive if the reason for energy's decline is global economic weakness. He also said there will be impact from the unwind of the equities related energy and commodities trades which he describes as "overcrowded."
"Ultimately, it should be good. It may not be good day one. because people have to take down earnings numbers and they have to react to that news," he said.
Levkovich has been favoring financials and certain consumer discretionary shares. He also likes health care and telecom services. Last month, he told me that health care stocks were like something you stored in the back of your attic, ignored and I would say, dusty. But since then, they've outperformed the market, rising more than 4 percent in the last month.
In a note today, he said equities are caught in a vacuum where the market had been suggesting that there was no value in many of the "franchise financial or consumer names." (those financials are certainly on fire today - up another 6.4 percent) Helped by JP Morgan'searnings, the group is in the second day of a major rally. Some of the most beaten up names - Lehmanand Washington Mutual- are scoring double digit gains.
"Financials are needed for the broad market to catch a real bid. It seems difficult to imagine that equity markets will trade higher without participation of the financial names, given the close connection between capital markets and capital market-sensitive stocks," he wrote in a note released this morning.
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