Sector Allocation Trade for a Market Bounce

I've taken the time to review all the moving parts after yesterday's close, so I thought I'd present my two cents in what I think will occur, and where the best risk rewards can be found.

First of all, is it a bottom?

Or at least a tradable bottom? I think so, and I'm going to operate under that assumption. There was some real selling pressure, especially in the commodities space earlier in the day. And add in the massive worst-of-breed rally in financials, I think we've seen the selling end for a little while. The bears can go and relax for a while.

The playbook says an "early cycle" rally.

That's going to mean financials, retailers and home builders. Yep, worst of breed. Since it is officially the 2nd half now, let's start chanting 2009 recovery. Whatever! Remember; the stock market is an expectations game. A recovery doesn't have to happen for the stocks to rally. We will play it accordingly.

I've already started my positions in the worst of breed, financials. But under the scenario of a early cycle rally (in the early part of a tradable bounce), then I want to be levered in this area.

That being said, I'm going to look for some retailers for the long side. Note, that I am NOT moving full scale back into the Generals (Ag, Coal, Steel, Natgas). However, I do have some exposure to the first two, and I do like Ag even here. The others, I don't believe offer the best risk:reward at this time. I suspect this area trades very choppy, and will rally in the latter part of this "tradable bounce."

As for natural gas and oil, I'm quite weary. If oil breaks down (and it could, with money flowing into early cycle stocks, and out of somewhere else - where would that somewhere else be? Oil, perhaps?) that is going to send oil and natural gas stocks down.

So, the game plan for the initial part of the bounce is:

Look for early cycle stocks (Retail holders (RTH), Ultra Consumer Services (UCC), Ultra Financials (UYG)).
Move to a slight positive on Agriculture, and neutral in other commodities (Potash (POT) and Mosaic (MOS)).
Stay neutral or bearish on oil and natural gas
Note - I'm going to avoid going long any specific of the worst-of-breed as we enter earnings season. Last thing I want, is to play a counter trend rally, and have it or one of its peers explode all over me.

And for the latter part of the rally; perhaps two weeks?

Scale more into coal, oil and natural gas.
Scale out of early cycle stocks and into some of the best of breed early cycle stocks like Goldman Sachs (GS), BlackRock (BLK) and Mastercard (MA).
At the end, this portfolio should end up with the Generals of old, plus a best of breed early cycle selection, which should act as a counter balance on those inevitable days where the market periodically becomes manic.-Jeff Fong in seeking alpha