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What Happened To Our Rally?

The commodity rally has taken a pause, and a very logical pause.

Remember - professional traders have LOVED playing the reflation trade - the China stimulus trade - the commodities trade - whatever you want to call it.

Why have they loved playing it? Because it has brought the stock market off of its "sell any rally" mode that has prevailed for the last 18 months!

Many commodity stocks have DOUBLED since the Dow hit its 1997 lows early in March.

However, today several events are slowing that trade down:

1) The dollar is rallying, as are bonds (lots of comments out of Asia that participants understand there is no alternative to the dollar)

2) Valero, the largest independent oil refiner in the U.S., shocked the Street by announcing a huge loss for the second quarter (a sizeable gain was expected) and by announcing a (also surprising) secondary offering. The message: demand for gasoline remains weak.

3) Stocks are no longer as cheap as they were in March, indeed this morning Credit Suisse became the latest firm to turn more cautious on stocks, taking its equity weighting down to in-line rather than overweight.

4) We are in the first of three days of jobs data, which is the weakest area of the economy. The data will indicate that the rate of job losses is not accelerating, but there is still very little hiring.

Does that mean the rally is over? Not likely. The economic data is likely to show slow improvement, and many traders have turned bullish only recently.

One example: Ned Davis, a well-respected commentator on the markets, last night increased his recommended weighting in stocks another 5 percent, to 70 percent (a 15 percent overweight). The remainder is 20 percent in bonds (15 percent underweight), and 10 percent cash.

The reason for the bullishness? Both the S&P 500 and the MSCI World Index are breaking out, and a worsened outlook for Treasuries.

Perhaps the most important factor is that most sectors are going up. As Ned observes, "One good definition of a bull market (or monster rally) is when most groups are going up." He notes that of 138 sub-industries he follows, 88 are in bullish trends, 19 are neutral and only 31 are bearish.

"[T]he implication is that clients should have as much equity exposure as their mandates allow," Tim Hayes wrote in a separate note from the company.

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