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Was yesterday’s selloff a lagged effect from Friday’s jobs data? Both the Treasury and equity markets stumbled on the increased prospect that six years of near zero borrowing costs in the US may end next month. Companies who are a heavily dependent upon trade fell the most, firms where the strengthening dollar would hurt results. Commodities also dropped and as a group are now trading at the lowest level s since 1999.
I rhetorically ask is the dollar’s rally in the proverbial final innings? How much higher can the dollar advance before greatly inhibiting the US economy?
I think the markets are at yet another inflection point. The relationship between the dollar/commodities/equities is extremely well known and programed into most algorithmic trading programs.
What are the odds the monies gravitate to something other than large cap growth, the sector of the market that experienced the greatest (and only) gains over the last 2 years? According to JP Morgan the divergence or the bifurcation between large cap growth and the rest of the market is the greatest in history.
The large cap growth trade is extremely crowded in so many aspects. First there are only a handful of “large cap growth issues” and fewer mega large cap growth issues. Second, the flow of funds into these concerns is exponential given the propensity of many to chase returns, an environment exacerbated by the proliferation of ETFs. Third any type of negative news, whether substantiated or not (i.e. Maillinckrodt) sends shares plunging.
Several weeks ago I quoted a SEC commissioner stating HFT/ETFs have created an “unlevel playing field,” an environment accentuated by the unknown impact/regulations of Dodd Frank.
I reiterate I think today may be analogous to 2002-2005 when value or the typical issue greatly outperformed the indices. In many regards, perhaps most specifically, most issues then, like today, were vastly under owned because of the “New Paradigm” abandonment and any type of buying would boost shares.
What will happen today? The economic calendar has several second tier statistics including a small business confidence survey, wholesale inventories and import prices.
Last night the foreign markets were down. London was down 0.57%, Paris down 0.67% and Frankfurt down 0.42%. China was down 0.18% , Japan up 0.15% and Hang Sang down 1.43%.
The Dow should open modestly lower, partially the result of monetary policy uncertainty. The 10-year is up 7/32 to yield 2.32%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.