It is time to be aggressive in my portfolio allocation ahead of the US Non Farm Payroll.

Investors have been taking some profits in the past two or three days after a surge of more than 20% in world stock markets. It is still too early to tell if the rebound was once again just trap for investors eager to invest back in stocks. I see a difference in pattern from the previous short rebounds, this time around economic data are turning positive (or less negative) with US Retail Sales and US Durable Good Orders better than expected. It seems that market expectations are too pessimistic and this is a good sign the rebound will continue. This Friday, the US unemployment rate will be released and I don’t think it will be as bad as many anticipate.

As a result I will use the coming trading day to make few changes in my portfolio. I need to be more aggressive to play the other leg of the market rebound. I added at the end a chart of trading companies’ performances relative to Nikkei225 and it is clear that if the stock market continues to rebound these companies will outperform. I also want to continue to play a rebound in technology stocks as consumer electronics companies might need to rebuild inventories ahead of the second half of the year. So here are the moves I will make at the market close today:

SELL

• Komatsu and Hitachi Construction Machinery (2% each): these two stocks had a nice ride so far but they have underperformed in the recent rally. I also have too much weight on these stocks because in the end the story for these two companies is still the same: Chinese infrastructure spending.
• Nippon Steel (3%): I wrote an article ( Increase competition in the steel industry might be costly to Nippon Steel and JFE Holding ) about the disappointing performance of such a high beta stock. I prefer to sell it all and buy a trading company stock instead.
• Shin-Etsu Chemical (2%): In my last article about technical analysis ( NIKKEI225: LT and ST Technical Analysis for some of the stocks ), I had an important resistance around 5000. I have a big weight on Shin-Etsu Chemical and think it is too much especially after the strong performance of the stock
• Kikkoman (1%): I just continue to sell the stock as I am not confident it will outperform the Nikkei225.

BUY

• Mitsui & Co (3%): the stock has been strongly correlated to the Nikkei225 since December. If the market rebound I expect the stock to outperform (see chart below)
• Mitsubishi UFJ (2%): It is one of the big winners of the financial crisis; it has increased its market share in Japan and, with its partnership with Morgan Stanley, will certainly increase it in the rest of the world.
• Seven & I (2%): The stock is sound financially and has a good growth strategy but for some reasons the stock has underperformed the market since January 1^st. It is a good opportunity to continue my investment in the company
• Asahi Glass (2%): It is not a real technology play, but I believe the company will benefit from the rebound in demand for glass used in LCD TV. Corning revised its guidance upward recently and Asahi Glass should have better than expected earnings this quarter.
• TDK (1%): A real technology play with strong balance sheet and a strong performance. The company should benefit from the pick in orders from consumer electronics companies.

Finally, even if it is difficult for me to predict exactly what world currencies are going to do over the next few months, I don’t think the yen will be a safe currency for investors. Japan’s economy is not strong enough to get out of the recession before the US economy. The upcoming election in Japan will be an issue for a government under already a lot of pressure. The LDP will probably try to please its voters more than do the right things to bring Japan out of the slump faster. As a result it is possible like Mrs Patterson, from JP Morgan, said today on CNBC that the dollar-yen will climb back to the 110 level. If that happen it will be great for exports related companies and another reasons to be bullish cyclicals in Japan.