The Reflation Trade Was Bludgeoned

The crowded reflation trade of a month ago is emptying fast. As I said then, once this turns, it will end badly since your fellow "investors" are not fundamentalists but mostly "hot money" types. When you are buying things on "thesis" with no real fundamental evidence other than "charts are looking good", once those program traders (and HAL9000) turn on you, you have no fundamental reason to be in the stocks.

This however shows why it is so hard to be an investor rather than a strategist - you can know the move up was based on hot air, but fighting the move 2 months ago would only cost you major money - and you look foolish while everyone says "hey the stocks know better than you do! The market is all-knowing!". And figuring out when reality sets in (and it's time to short) is also hard to time. So you can be conceptually correct, but placing orders (shorts) correctly so that you are not steamrolled by a bevy of snorting bulls is problematic.

That said, the downturn is now going very fast and I'd expect a bounce somewhere.

Things are so bad Freeport McMoran (FCX) is down on an upgrade.

Some names to throw out there...

One name showing some signs of green early is Monsanto (MON) which is very overdue for a bounce, even if its of the dead cat variety.

Disclosure: No positions

Comments

[CautiousInv...:]

This is a most informative article, highlighting the challenges of investing when the market gets ahead of itself in a very complex economic environment.

This anticipated sector rotation corresponds with classical patterns of the past in which materials, industrials, consumer discretionary and financials start advancing at the trough of ISM surveys in anticipation of economic recovery. This is typical in V shaped recoveries.

In today's market, though, we have a situation in which the ISM data has bottomed but the economic recovery is being questioned and reexamined in the light of much doubt. Unlike previous cycles in which the uptick comes immediately after the bottom ( the V ), we may crawl along the bottom until needed structural changes take place and consumer balance sheets are repaired. This could take several years and there will be other challenges along the way.

Looking forward, we very well might see alternating rounds of deflation/reflation investment themes recur until the reflation side is proven lasting.

Jul 07 08:12 AM

[TCK:]

There is an inherent problem in trading these stocks as they are basically momentum plays. Huge moves of 30% to 40% up and down are common and perhaps best left to the professional trader.

Jul 07 10:30 AM

[TraderMark:]

Great comment - people are still going off the "inventory bloat" recession idea, when this is a structural change.


On Jul 07 08:12 AM CautiousInvestor wrote:

> This is a most informative article, highlighting the challenges of
> investing when the market gets ahead of itself in a very complex
> economic environment.
>
> This anticipated sector rotation corresponds with classical patterns
> of the past in which materials, industrials, consumer discretionary
> and financials start advancing at the trough of ISM surveys in anticipation
> of economic recovery. This is typical in V shaped recoveries.
>
> In today's market, though, we have a situation in which the ISM data
> has bottomed but the economic recovery is being questioned and reexamined
> in the light of much doubt. Unlike previous cycles in which the uptick
> comes immediately after the bottom ( the V ), we may crawl along
> the bottom until needed structural changes take place and consumer
> balance sheets are repaired. This could take several years and there
> will be other challenges along the way.
>
> Looking forward, we very well might see alternating rounds of deflation/reflation
> investment themes recur until the reflation side is proven lasting.

Jul 07 11:34 AM

[Mad Hedge F...:]

Good piece. Given the profusion of negative indicators, and moving averages rolling over like the Bismarck, I would be remiss in my public duties if I did not tell you to sell everything. Dump the reflation trade. The “green shoots” are dead. Liquidate emerging markets (EEM), commodities (DBA), the metals (GLD), foreign currencies (XEU), and cover your shorts on safe haven pays like Treasuries (TBT), and the yen (XJY). Real estate in all forms will continue to die its own private death. Batten down the hatches. Reduce your risk. If you can’t sell, then hedge your positions. If you can’t hedge, then sell calls against you positions. If you can’t sell calls, then find another line of work, because there are so many inverse ETF’s around these days, you no longer have an excuse to take a big downside hit. This is where your stops earn their pay. I begged you, pleaded with you, and beseeched you to dump your position on May 1 (see “sell and May and Go Away” (www.madhedgefundtrader...) and June 16 see “the worm has finally turned” (see www.madhedgefundtrader...), and now I am trying again. Please also revisit the short plays I offered earlier on the S&P 500 (SDS) (see www.madhedgefundtrader...) and the Euro (DRR) (see www.madhedgefundtrader...). And don’t ever call me indecisive, waffling, or equivocating.

Jul 07 12:03 PM