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The 'Flation Rotation


See the pitch before taking your cuts!


Good morning and welcome back to the five-day snack. With last week's confusion fresh in our mind, we enter this stretch with thoughts intertwined. On one hand we swallowed a slew of bad news (both Cisco (CSCO) and Dell (DELL) left Boo unenthused) but the overall tape continued to muse that it wasn't yet time for a much broader bruise. Will Hoofy end up with a Valentine schtupp or can Daisy maintain her fine buttercup? We'll know soon enough as we break out the spoons and ready ourselves for some new minxy tunes!

There was alotta shufflin' last week as macro funds got dealt a fresh hand. The hint of reflation, alluded to by Fed head Guynn, found its way into the metal markets midweek and flushed through equities by Friday. The dollar gave some greenback (as you might expect) and left investors wondering if we're in a sweet spot or a tough spot. It seems to me that we're somewhere between stagflation (goodbye dollar) and deflation (everything else) and Elmer is delicately trying to balance that dynamic. As long as we're lofty, the mainstream assumption is that he's the man with a plan with flames he can fan.

That collective psychology will dictate the price action which, in turn, will provide some hindsight clarity. As we've already learned (both ways) in 2005, ample reasons will be assigned to the rhymes after thy Minx has spoken. I have no edge on timing (sorry) but the conditional elements in place (lopsided sentiment, low volatility assumptions) and rationalized reasoning (firm credit markets) leave the probability spectrum wide open. That is why I've shortened my risk horizon and focused on the tea leaves rather than the broader broth. The onus is on each of us to identify a style that allows us to prosper while preserving our hard earned capital. Patience. Adaptation. Discipline.

Sir Elmer will arrive on Wednesday for two days of Buzz and Banter. The posturing (into the event) and reaction (after) will be the big story on Wall Street this week. The supply and demand may not differentiate between legitimate growth and debt-induced largess but the structural implications highlight the dichotomy. We saw it throughout January (deflation/strong dollar) and the mirror image late last week. Indeed, if there has been a consistent theme this year, it has been the intra- and inter-market rotations as we all try to figure it out.

Michael Santoli noted in his always excellent weekend column that the S&P has meandered in a 5% range (1162-1217) ever since the dreadful '04 range was broken with post-election clarity. He also noted that, over the last 60 years, the Minx has only delivered consecutive 0-10% moves once. That speaks to the probability spectrum discussed earlier and opens the door to both the Matador Crowd and Red Dye contingent. And yes, while we may also remain muddled in a Sammy slither, that prognosis already seems a bit popular in the paid press.

We power up this Valentine's pup to find a flattish Europe, sluggish dollar (DXY 84) and smilin' metals. The tenor is consistent with what we saw on Friday and "should" bode well for equities if current trends persist. Please keep an eye on NDX 1540-1550 (resistance) and note that the financials have been "financing" the rotation into beta. BKX 102 is worthy of a mention in that regard as resistance coincides with some toppy stochastics in the S&P space.

Good luck today.

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