Trader Talk

"Last Great Trade Cycle": Is It Over And What Lies Ahead?

Is the "last great trade" of this cycle over? In the third quarter, the trade that worked was "short financials, go long tech." Then in the first quarter, the trade was "short the dollar, go long commodities," and "short stocks, go long bonds." These last two trades are now showing signs of unwinding.

Last week the dollar had one of its biggest rallies--and commodities one of its biggest declines--in years, and although commodities have stabilized today the psychological damage has been done.

Today, bonds are having one of the worst days in a long time as the "flight to safety" trade seems to be unwinding. The VIX, a measure of the cost of buying puts and calls for the S&P 500 and often used as a fear indicator, is at its lowest level in nearly a month.

Some will argue that the unwinding of these two trades are simply end-of-the-quarter profit taking. There may be something to this; if that is the case, then the dollar will resume its descent, and bonds and commodities will rise again in a few days. But many are betting this is unlikely, and there is a new trade emerging: "long tech and financials, short commodities and bonds."

Another trend to watch: home builders. No other group has been so shorted, so hated, and no other group has had so many trying to pick a bottom (since November--unsuccessfully!).

But something is happening here. Existing home sales for February showed the first monthly rise in a year.Inventories are still high at a 9.6 month supply, but it's the lowest since August. And prices continue to fall. Median prices are down 8.2 percent year over year. Higher sales, lower prices: that is what is needed to clean out the inventory.

As a result, stocks like Ryland and Toll are breaking out to their highest levels in six months.

Questions?  Comments?