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The "Reflation" Trade Gets Real

Today's rally is based on a combination of the reflation trade, dramatically oversold conditions, and late-day chatter that the House will hold hearings on mark-to-market.

The "reflation trade" gets more real.

I've noted that a small group of traders have been picking at commodity and energy stocks for a month, on the grounds that the U.S. and Chinese stimulus packages will to varying degrees "reflate" commodity demand later in the year.

In general, these trades have not been successful. Traders playing this game are not wrong—there is little doubt reflation will occur—the question is when. These traders have simply gotten in a bit too early.

Today, that trade got a little more real, as the Chinese said their PMI index rose for the third straight month and the Chinese premier said another stimulus package would be unveiled tomorrow.

Those facts, combined with dramatically oversold conditions, helped move commodity stocks up on heavy volume.

Financials get a boost.

Here again, the combination of heavy short positions, and talk of hearings on mark-to-market accounting, provided a modest boost to a few financial stocks, but by no means all, with many that popped initially falling back into the close.

Mark to market accounting has become a bete noire of traders. Word that the House Financial Services subcommittee may hold a hearing on the accounting rule on March 12 put an additional bid into bank stocks in the last hour.

Hearings are certainly not surprising. Nor is covering short positions just on the word of a hearing.

Odds are still against a change of the rules.

    • Why Investors Are So Worried About General Electric

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