Buy Commodities, Sell Financials May Finally Be Over?

The two factors moving the market today were 1) the drop in oil, now down almost 10 percent in two days, and 2) the rally in financials.


Traders tried unwinding this trade in May, and they got burned badly. But there are a number of indicators that this time around the unwind has traction.

1) The rally in financials. For the first time since March, traders are trying to make a stand in financials. The impetus was Wells Fargo , not only beating but raising its dividend.

There may also be more at work here. Much of the rally in financials, of course, is due to short covering. There are reports that bank stocks are harder to borrow, either through higher borrowing costs and/or share availability; this is also helping the short squeeze.

It's a good start, but it's not enough to sustain a real rally. What we need now is a little follow-through on the earnings front…I doubt Merrill Lynchwill have a lot good to say tomorrow, unless they announce an asset sale…we need Bank of New York , Huntington Banc , JP Morgan and PNC Bank not to be disasters…they are all tomorrow.

2) Have energy and material stocks topped out? This is anathema to energy bulls, but since hitting its historic high on May 21, the S&P Energy Sectoris down 16 percent.

Energy stocks this month:
Weatherford down 21 percent.
Noble down 15 percent.
Apache down 17.3 percent.
Exxon down 8.8 percent.

Material stocks are also looking toppy; since hitting its historic high on May 19th, the S&P Materials Sector is also down 16.6 percent.

3) Rotation into other names more obvious. Particularly in healthcare, where Johnson and Johnson is at a new high, and other names like Schering-Plough are up 12 percent this month.

Dredging up famous old names. How desperate are traders to call a bottom? Remember Joseph Granville, famous for his bear calls from the 1970s into the 1990s? Traders are passing around a letter from Granville, written last night, where he claims that this is a bottom, largely on the basis of the huge number of new lows the market saw yesterday.

Excerpts from the letter: "The bottoming process has matured. I can now forecast that a Dow bear market rally is about to get underway. What is behind it is the predicted collapse in the price of crude oil. I would now cover all short sales with the exception of the oils."

Questions? Comments?