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Eye of the Hurricane?


With dark clouds behind them and clearing skies overhead some are convinced the coast is clear...

Every play, movie, and soap opera needs a script. Last week we talked about a potential rally into the close of the year. Just about everyone knew the market was on the ropes so odds of a bounce were high. The actors were a little off cue with the curtain failing to rise until Tuesday after a gut wrenching Monday sell off.

While the market may follow this story line and drift upward into the close of the year, many of your best performing stocks may not go along for the ride. Goldman didn't help Friday cutting estimates and targets on nearly every tech stock in its universe.

Friday's headline wasn't that the markets were up for a fourth day in a row. The open lifted all boats but as the day unfolded the real story started to leak out. When it became apparent that financials were going to move north in a big way due to friendly remarks from the Fed and Washington, program traders set up a massive growth to value trade that caught many by surprise. This year's winners took a hit as losers advanced. Even laggards like Starbucks (SBUX) had a good day.

This could be seen clearly by observing the Exchange Traded Funds IWF (iShares Trust Russell 1000 Growth Index) and IWD (iShares Trust Russell 1000 Value Index). Growth has been trouncing value all year turning in an 11.45% return with value still red despite recent moves. Friday the tables were turned with growth barely able to keep positive and value led by financials bounced another 1.9%. While I expect growth to continue its out-performance next year, nimble traders are taking advantage of the current environment.

These counter trend rallies can be very disruptive and cause the most damage. Shaken investors desperate for a big win re-position their portfolios, buying up all the beaten down housing and financial stocks. With dark clouds behind them and clearing skies overhead they are convinced the coast is clear. What if this is just the "Eye of the Hurricane"?

If you are playing these stocks for the bounce the timing seems to be in your favor. We are past earnings season and the confessional doesn't open until the New Year when companies will start to pre-announce. We do have two big items to contend with, the Fed meeting on the 11th and the employment number this Friday. We already know the answer to the Fed's intentions. The only question left is not if but by how much they cut.

I know the bull thesis is to not fight the Fed. Statistics show that the markets rally when the Fed is in easing mode. However, the lag factor can be significant. How much power does the Fed really have in today's global economy to impact the markets efficiently and quickly? Sometimes I feel we place too much confidence in the Fed's ability to determine our financial destiny.

Could I be wrong? Absolutely, but until I see data that supports another argument I have to place my bets accordingly. If you aren't buying any of my thesis trust me you are not alone. Let me leave you with a lesson my mother taught me long ago. When you go to the theater always look for the exit in case there's a fire. Better yet sit next to it.
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No positions in stocks mentioned.
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