Inflection Day Rally Effects – Rotation Underway

text from yesterday's weekly report:
As the "Inflection Day" rally rolls on, a rotational pattern seems to be emerging. The recent emerging weakness in Consumer Staples combined with strength in areas such as Consumer Discretionary and Mid Cap Growth suggest a sustainable near term rally in the latter groups is highly probable. Furthermore, it can be assumed that other similar riskier groups (Small Cap Growth, for example) are likely to follow as a summer rally emerges after an expected period of weakness this month.

A catalyst for much of this potential strength is the rebate checks in the mail, the majority of which should be received and spent this quarter, 2Q08.

FYI - The economic and valuation effect of the stimulus is noted on page 3 in this week's report.

The US consumer’s desire to spend was evident in last week’s consumer credit report, as the first chart above shows quite clearly.

This appetite to spend, to maintain one’s existing lifestyle, occurs despite the fact that real disposable income is under pressure (see second chart).

Investment Strategy Implications

Consumer sentiment may be at a very low point (next report on this due this Friday) but the need to maintain one’s lifestyle still remains an important factor of American life. This will change, however, as time passes. Savings will rise as the obvious consequences of a negative wealth effect alter consumer behavior, particularly among baby boomers whose retirement timeframes come into sharper (and closer) view with each passing year.

But that is then and this is now. And it is in the now that many investors operate in. Therefore, a counter trend rotational rally will likely unfold this summer with higher risk groups, such as Mid Cap Growth and Consumer Discretionary, outperforming the more defensive areas such as Consumer Staples. After that, a reversion to their secular trends should resume with a very strong downward tilt for the overall market going into the fall of this year and into 2009.

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