Why It's A Different Market One Month Later

There are notable shifts occurring in the stock market on the dollar rally/commodity drop this week.

1) lower oil has been a notable help to retailers and airlines

2) lower commodity costs in general, from copper to grains to plastics, have been a big help to consumer and material stocks, many of whom have bitterly complained of rising raw material costs

3) the dollar rally has helped small cap stocks. Again today the Russell 2000, the main small cap index, is outperforming the S&P 500. In fact, since the dollar hit its recent low (July 15, the market bottom), the Russell 2000 has rallied 10 percent, while the S&P 500 is up only 5.6 percent.

Why small caps? They are not dependent on exports to grow, as multinationals are. The strong dollar makes exports more expensive and less competitive.

As for the large caps, modest rallies in airlines, autos, and retailers is to be expected on the lower commodities, particularly oil.

However, it's one thing to unwind the "long commodity trade"--that's already being done. It's another entirely to unwind the "short financial" trade. After a brief rally in mid-July, most big financials--Citi , JP Morgan , Bank of America , have gone nowhere. Indeed, those perceived to be weakest--Wachovia , Washington Mutual , and many regional banks--are all down this week.

That's because traders are passing around bearish analysts reports like this one from UBS: "the availability of credit is declining-even for good customers. For example, BAC [Bank of America] is cutting credit lines for home equity and card-especially in the weakest housing markets. And many other banks are in the process of reducing commercial credit lines."

Bottom line: this is a very different market than one month ago, with the Dow and S&P at 6-week highs, but we are not out of the woods yet.

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