If you go by the old rules this market doesn't make much sense. Today we had another weak ISM Manufacturing print yet the strongest stocks are pro cyclical. Steel, coal, metals/mining, and oil services are the leadership today. From a rotation standpoint that is a positive step. From a sense standpoint it seems to be entirely based on monetary easing and little in the 'real economy'.
It is very difficult to reconcile some things you see in the market today with the 'handbook'. The belief in monetary easing at the zero bound on the economy is unending although we see a lack of evidence of that in reality. While it has some form of effect on animal spirits and hence asset prices, there does not appear much benefit in our actual economic lives. Trillions of global easing has given us a recession in Europe and "meh" economy in the U.S. – yet algos or humans or whomever continue to bid up groups on the same belief of recovery (or at least asset manipulation).
With that said, if you ignore every piece of news across the globe and only looked at stocks, this is the type of rotation you'd want to see. Semiconductors have also popped the past few days and held in. Transports however are lagging, and much like we saw in March and April this rally is very heavy on big caps and small caps are lagging substantially.
I think once we get past Friday the bulk of headlines should be over for a while- at that point if no QE later today then domestically it will just be Jackson Hole, WY talk where Ben laid out the framework for QE2, and then looking ahead 6 weeks til the next Fed meeting. Depending on what the ECB does it will be a lot of staring at Spanish yields. But between now and 8:30 AM Friday, the potential for extreme moves either up or down is high.
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