Market Rally Review

Markets took off yesterday, climbing gradually all day, and closing near their highs. While Oil, which traded down to 7 month lows below $64, gets the credit, there were several other factors impacting trade. These are:

Underperforming Hedge Funds:   Given all the market confusion — interest rates, earnings., geo-political issues and commodity prices, poor bets on emerging markets and housing-related shares — many of the larger hedgies have put in mediocre numbers for the year. With Q4 rapidly approaching, they have a narrow window to generate some alpha. Which leads to:

Sector Rotation Chasing Beta:  Fast money has fled materials and energy, and piled into semiconductors and tech. I am not sure if this is fundamentally warranted, given the decreasing margins in the chip space, and price wars between Intel and AMD, Sandisk and Samsung. DRAM prices continue to plummet. Regardless, once the sector heats up like this, quick gains are possible.

Quadruple Witching Expiry:  With options hedging against long positioned portfolios, there is natural pressure the other way. Expiration will explain some of the activity in stocks with a large open interest.

Key Technical Levels:  The recent September 5th highs have been beaten on most of the indices. Given the improving — but unimpressive — volume, one has to wonder how far this can run.  I would expect a legitimate dash for the May highs as the next target. While the September highs were easily breached, the May highs are much more

Recession avoidance odds improve: Given the major factor Oil
has played in recession fears , the drop into the low $60s raises the
odds for a soft landing from a "long shot" to "sleight chance." We are still likely to slow appreciably, but chatter about $100 oil will be stifled. An economic slowing is in the cards; If Oil stays relatively lower (note I
didn’t say cheap) for an extended period of time, expect recession fears to
recede, and consumer sentiment to improve.   

Cash Savings for Gasoline: Given that Mortgage Equity Extraction is trending lower this year — although not nearly as much as you might have expected in Q2 — this creates a potential improved cash postion for lower income shoppers at Walmart and Target.  One might also see some potential improvement of SUV sales at GM and Ford.

Geopolitics is another wild card, as are the US mid-term elections.

I would be remiss if I didn’t point out what the usually chipper Greg Ip noted in this morning’s WSJ:

"The falling price of oil also may be an ominous sign if it reflects decreased global demand, which would indicate decreased economic activity. The International Energy Agency yesterday revised down its forecast for oil demand growth world-wide this year, "largely due to revisions to North American preliminary data, flat consumption in Europe, and continued demand sluggishness in the Pacific."

So before you break out the noise  makers and champagen, understand the context of this price drop. Even the fall in gold implies a whiff of deflation, coming on top of so much Fed induced reflation and inflation.

As to Oil and consumer spending, some of the commentators on this have been wildly inconsistent, and I will have more on their flip flops, sometime later this week . . .


Hedge Funds Miss Their Target
Some Prominent Names Are Coming Up Short Of Benchmarks
September 13, 2006; Page C1

Falling Oil Prices May Spell Relief for Consumers
More Pocket Money Helps Economy Overcome Trouble
On Housing, Inflation Fronts

September 13, 2006

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