• The Fed Chairman’s comments this morning add a new wrinkle to the reflation trade (I highly recommend reading the commentary for those interested in a brief overview of the before and after of Fed policy during the last few years).   In addition to China’s impending tightening it is now clear that the Fed has tightening on their radar as well.  While it doesn’t strike me as a near-term risk it does add a psychological uncertainty to the risk trade.   The Fed Chairman was clear – stimulus is beginning to come out of the market and that creates a great deal of uncertainty.

• We continue to sit out of the risk trade here.  Market internals remain negative and this recent attempt to form a bottom just doesn’t add up.  The Euro rallied on news that is anything but positive (we learned to sell the bailouts in 2008) and we still struggle to find a fundamental catalyst for a higher market.   The “buy the dip” mentality appears to be gaining traction and that could very well serve as the catalyst for another 5% dip as sentiment has quickly shifted from bearish to bullish on the drop of a hat.  Without seeing deeply oversold fear-filled psychological lows the risks to the downside continue to outweigh the rewards on the upside.    On a long-term fundamental basis, I continue to fail to understand why any investor would “buy and hold” (or buy, hold and hope) this market.

• The biggest risk to this near-term positioning is the dollar.  We came into the year as dollar bulls and it has rallied substantially since the low in December.   The dollar is no longer the glaring value it was back in December when compared to most other currencies.   A counter-trend decline could develop in the next few weeks, but don’t expect it to last.  Chatter of rate hikes and continuing risk aversion should serve as a support for dollars.  In addition, the fundamental risks in the Eurozone remain significant and the resolution of problems in Greece only open the door to more handouts.  While many view this as a potential solution we view it as a potential opening of Pandora’s Box.   This combined with the continuing global tightening risks, uncertainty on regulation and an end to an earnings season which should have been a catalyst for higher stocks leaves us in a similar place to Tim Bond – wishing the risk takers the best of luck.

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