Notes on a Worst-of-Breed Rally

July 8, 2008

I have to tell you it is almost uncanny how every recent correction has
played out almost identically. We’ve been talking about this for the past
month - first goes the weak sisters of retail, financials, and homebuilders
(the “early cycle recovery” stocks), then come the non-early cycle but
non-commodity (tech is a great example), and everyone runs into
commodities as a “safe haven” while the rest of the market crumbles. At
which point, the bears come to the safe havens and maul the last group
hiding. (that stage has happened over the past week)

Then we
move to the next stage where the hedge funds, flush with the
governments ‘easy print’ cash need to find someplace to run up, so they
go back to the early cycle names (along with short covering). Aside
from Monday, which appears to be a situation that was specific to
Fannie Mae and Freddie Mac, we seem to have been entering that phase
the past week - these sectors, if not rallying, stopped going down.
Only homebuilders were lagging. And most joined the party yesterday.

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