In the middle of March the market violently derated Commodities and China exposed stocks on shadow banking concerns and fears of further unwind of financing deals. Then Premier Li sprayed some fairy dust with his magic wand when he said the government will do whatever it takes to support growth. Even though the announcement was limited to railway construction projects and tax relief reforms, not pure stimulus per se, the markets took relief and rallied back up. Wait, it’s not over yet…

In the background, the USD had its fair share of shenanigans. Yellen started off her first performance uttering phrases without fully grasping the consequences of her words when suggested “rates could rise about 6 months after the end of Fed bond buying,” to which the market violently bought the USD as its forecast for higher rates moved a quarter or two ahead. Last night the Fed minutes said “oh we’re sorry, the market overstated the shift in projections and estimates were misconstrued.” Down went the USD against every possible currency cleaning up everyone in FX land, as the house always wins. Anyone nauseous yet?

Thank you central banks for providing the “accommodative monetary easing” platform but can you do it with a bit more consistency and clarity please? As the market makes new highs, it has little to hold onto other than the words and intentions of policy makers to gauge where the next leg will come from.

China is up 6%. SPY is down 2%. EEM is up 6.5%, and DXJ is down 6%, to name a few. The Yen up, emerging market currencies are rallying together with miners – notice a familiar trend? If one were to look at a basket of most well known hedge fund longs against most well known hedge fund shorts, that basket is down 7% in last two weeks alone! Just goes to show how much blood there is on the streets. All of the themes and winners from end 2013 into early 2014 have been killed vs. the losers; classic unwind. Broader level markets may have been in a small range but cross books have seen some extremely large and violent sub sector and stock rotations.

Going back to the pure Commodity investor, all they see is the USD falling, emerging market currencies rallying, China up, and scream “Voila! The recovery has started! Pile in!” Liquidity purging events like this have a domino effect and usually take a week or so to normalize. An unwind can mask itself as a global recovery trade, especially when valuations are so low and one is only looking for an excuse to buy; self-fulfilling prophecy?

Now lets look at fundamentals. Nothing has changed. BoJ came out yesterday announcing no further easing despite the sales hike in April. China consistently saying that they will roll out more policies to support growth while avoiding stronger stimulus. Fed continues to taper. China export data that came out yesterday showed an unexpected fall of 6.6% in March vs. expectations of 4.8% gain (steepest drop since 2009!). The last few data points in the US have shown some improvement from Jan-Feb winter woes, but who is to say this is a genuine recovery?

Even in commodity markets, nothing has changed in the demand / supply balances other than perception. The trade is still to be short the Mining sector and stocks lacking growth, limited free cash flow yield and exposed to commodities like Iron Ore, Copper, and Steel as there is too much supply capping price gains. Names like Arcelor Mittal, Antofagasta, Freeport, etc will all fall again as all benefits of cost restructuring and recovery are priced in and their respective Commodities can not move higher for now. Alcoa, on the other hand, is a different story as it is showing genuine improvements in its earnings base in downstream and realizing higher premiums. And they are doing all this in a flat Aluminum price environment.

Time to be selective and focus on stock specifics than just chase the herd and buy everything; there is a time to be greedy and a time to be prudent.