Jay Matulich

Hot Summer for the Bulls?
Q&A with Jay Matulich, Septos Capital Management

What do you make of this rally we've had?

This rally from March 17 basically to what looks like May 5 (yesterday) was a decent rally, but was somewhat thin on the technical side in terms of the advance-decline line and volume. In addition, I believe any rallies at the moment are bear-market rallies. But at least it set in motion the inkling that we may have higher prices down the road. Q2 and Q3 could be very interesting for the market, albeit probably in a choppy way, but still could be interesting to the upside.

How so?

There's been quite a bit of damage done since October 2007, and markets tend to breathe. We've had a pretty good downdraft, and then a comeback and are basically treading water. I've been looking for May to be choppy with a bias to the downside, where we've got multiple groups correcting, some groups doing better on a relative strength basis, like technology and finance vis-a-vis some of the materials. But I think once we get past the treading water phase it could be a fairly interesting market this summer going into the election. It could be a move where the S&P goes from, say, 1320-30 up into the high 1400s, and where on an absolute basis some groups that have beaten down a lot like finance and technology outperform the market.

What do you see for commodities and the dollar?

I covered my Euro short on Friday, which ended up being a good trade from the middle of March. Everybody jumped on this bandwagon where the dollar is only going to get stronger. It may for the month of May, but then I think we start going back down again, and that's where I think commodities could actually start having a big move this summer also. So, I see more of the same in this upcoming rally -- weak dollar, commodities strong, but also you've got the market being strong also.

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What do you see fueling commodities?

I actually see downward prices in oil as a catalyst. Looking at the way oil has been reacting -- especially with oil going up while the dollar has been going up -- that tells me that this short dollar/long energy trade may not be really what was happening over the last few months. It could be that we may have a real supply-demand issue with oil, and it may give us a blow-off month into the first week of June. If that happens then I think you could wind up shorting oil during the summer, believe it or not, and being long stocks, even quite frankly commodity stocks. They actually would benefit even more because of lower energy expenses. Commodity stocks like agriculture and fertilizer are somewhat energy intensive, and they may be decoupling, especially agricultural stocks. I would look for downdrafts in commodity stocks in May, even in gold, accumulating if it gets down between 830 and 800.

What other stocks should benefit this summer?

If things pan out, where am I going to get the most leverage? I think really it's still financials and technology, but I also think the consumer side could be kind of interesting, too. Internationally, I think Japan looks pretty good, although it's had a huge move so far, up 11% in April. If it corrects big time in May I would look to enter Japan.

How long do you see this rally lasting?

I think we're in a respite period for at least the next six months in financials where the news could be bad but not as bad as it could be just because of what the Fed has done with their lending facilities and money supply. There could be a hiatus from a lot of bank troubles, yet I think it comes back Q4 into Q1 of next year, which could be very problematic for the market in a big way. So, although there's still a lot of trouble down the road, I think we get a respite. That's my whole sense here for some type of catalyst for the market.

So you're still bearish longer-term?

Yes, longer-term I'm still sticking to that thesis of what I've been saying since Q4 of 2007, that these are short-lived rallies in a bear market.

Jay Matulich is principal of Los Angeles-based Septos Capital Management. To contact Jay with questions or comments, please email info@advicetrade.com.