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Equities rallied as oil surged another 4% as it has been reported that Saudi Arabia and Russia has agreed on a production cap.  The dollar also fell.  Crude is now up about 10% for the year and over 60% from its mid-February lows.

Perhaps the three greatest surprises of 2016 is the drop in the dollar, the rally in crude and the “unloved” issues grossly outperforming large capitalized momentum growth.

Is this the start of a trend or is this all just a one off event?  To write the obvious, it depends upon economic growth, earnings and interest rates.

Several weeks ago I quoted a Goldman Sach’s report stating small cap companies are 40% below their mean as compared to the S & P.  Historically they are about 40% more expensive.  Similarly, value is at the “cheapest” relative value as compared to growth since at least 1980, also according to a dated Goldman study.

In my view there are a host of potential reasons for today’s environment including the proliferation of ETFs where there are now more ETFs than listed stocks, High Frequency Trading, regulatory pressures that discourage ownership of the smaller capitalized issues and momentum, a trading strategy stating the current trend will last forever.

However I believe monies ultimately gravitate to the sectors that potentially offer the greatest potential rewards and the last amount of risk.  If Goldman’s analysis is correct, this environment should be in the small cap and value entities.

Value is rallying.  Is small cap next?  As noted above it depends upon earnings, interest rates and economic activity, all three of which I think are fully discounted in the negative sense.

Today March retail sales are posted as is the PPI.  Also released is the Beige Book or the statistical compilation utilized at the upcoming Fed meeting.  All can influence trading.

Last night the foreign markets were up.  London was up 1.49%, Paris up 2.55% and Frankfurt up 2.26%.  China was up 1.39%, Japan up 2.84% and Hang Sang up 3.19%.

The Dow should open moderately higher on Chinese trade data suggesting the world’s second largest economy is stabilizing and better than expected earnings for money center bank.  Oil is down about 1% ahead of key inventory data released at 10:30. The 10-year is off 3/32 to yield 1.79%.

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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.