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'Less Bad' Is Not Good Enough For Markets (update)

Is this the inflection point? For weeks there has been a simple trade going on which has made a lot of money for the participants: go long commodity and techs, and short bonds and the dollar.

This trade is now looking very long in the tooth. It's broken down today, as the dollar and bonds are rallying, while commodities and techs are among the weakest groups.

In particular, transports--a leading proxy for the commodity trade--are far and away the weakest sector, down 2.5 percent today.

It's early to talk about new leadership, but in the last two days we have seen telecom, utilities and healthcare--defensive names all--outperform the overall market.

What's next? Given the information we have now--some kind of bottom but a very shaky recovery--the vast majority of traders think we are likely to remain rangebound.

  • Obama Isn't Trying to Take Over Markets: Summers

We need new information--"less bad" is no longer going to cut it. We need "notable improvement" or "no improvement" or "deteriorating" to get out of this range and right now ... we don have it.

Of course, we could also get a change of sentiment if, say, commodities start looking toppy, as they are beginning to do. What would that change of sentiment sound like?

  • China Industry Output Beats Forecasts, Sales Up

Instead of "we're buying on the China stimulus" as a mantra, you will start hearing, "China is using their money to stockpile commodities while reducing Treasury purchases; traders are confusing this with a turn in the economy."

Update: Commodity price increases do not mean improved fundamentals. Doubt that? Look at what happened on lumber futures today—they are limit up ($10), to $224.80.

Has the housing market suddenly improved? China buying lumber? No. Traders note that lumber producers were CLOSING additional plants or increasing downtime because lumber demand is weak, and as a result mills are raising asking prices.

Update 2: Stocks are rallying modestly on a Dow Jones report that Mousavi has won the Iranian election with 65 percent of the vote, according to a close aide.

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