On a week that has seen light trading, there has nonetheless been a change in outlook. In the last two weeks, I have seen money moving AROUND and INTO the stock market, rather than money moving OUT of the stock market.
Specifically, many now believe that a bottom is in for financials, retail, and some big-cap energy stocks, and that techs have a reasonable run at a rally.
Why do some traders feel this way? For months, traders have adopted extremely short-term technical trading methodologies to deal with a market that could turn in either direction on a dime. But this week bulls argued that it may now be possible to envision a longer-term play:
--with the commodity markets clearly in decline, the inflation cycle has peaked;
--the news from the U.K., the Eurozone and Hong Kong indicate that a global slowdown is now underway, and that many countries would be lowering interest rates soon;
--that the United States was much further along in the economic cycle than the rest of the world;
--that this argued for strength in the dollar, which would help the balance of payments.
The implications:
--the U.S. stock market will be the preferred market in the coming months
--small caps will outperform large caps on the dollar strength
--play U.S. tech stocks on seasonal strength
Of course, bears put out that the global slowdown and the dollar's strength will create headwinds for big-cap U.S. multinationals. This is undoubtedly true, but for the moment the bulls are ignoring this fact, just as they ignored that their “de-coupling” theory was all wrong.
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