Wednesday, May 11, 2016

Tactically taking profits on the commodity and reflation trade

Mid-week market update: Regular readers know that I have been bullish on the commodity and reflation trade (see A possible generational low in oil and energy stocks and The road to a 2016 market top). On the weekend, I postulated three separate short-term scenarios for the stock market  (see *Sigh* Another growth scare):
  1. The growth scare recedes and the market pushes upwards to test and possibly exceed the all-time highs;
  2. The growth scare continues, which results in a choppy range-bound market; or
  3. The growth scare intensifies and the market breaks support, with a measured SPX target of 1970-1980.
It seems that circumstances are converging towards scenario 2 and 3. It`s time to make a call to take trading profits in both the long SPX and commodity positions. The combination of excessive market positioning and weakness in China are raising red flags, from the viewpoints of cross-asset and inter-market analysis.

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