"It ain't over till it's over." - Yogi Berra
In the face of low volume, traders taking off early for Thanksgiving, and continued uncertainty over the Fiscal Cliff, stocks around the world did what they usually do - move powerfully when you least expect it. European stocks had their best week of 2012, with the German DAX surging over 5%. Greek stocks rallied immensely as well on optimism over the next tranche of aid. U.S markets reacted in sympathy, with most equity averages having their best week since June when the market bottomed before the Summer Surprise/end to the end of the world trade. Very suddenly, an extreme move up has happened in the blink of an eye.
The move last week undid the entire month's decline for equities, making the S&P 500 flat for the year, and bringing its total return to over 14% for 2012. The market is saying that the Fiscal Cliff will get resolved, and that the near-term concerns over Greece are ending which I highlighted earlier this month was a more important issue for risk assets than U.S. elections. The question now, of course, becomes whether the move last week was legitimate, causing a V-like formation that can continue in stocks, or a last gasp move by the bulls this year.
Last Monday, I began aggressively making the case in my writings that fear is bullish, and can be more stimulative than any round of Quantitative Easing by the Fed. The corrective environment sent Treasury bond yields tumbling lower, putting the Bear Paradox back in play. The whole idea of the Bear Paradox is that, barring a credit event, any deep decline in stocks is unlikely in the face of panic low yields in Treasuries relative to stock dividend yields which would only get higher the deeper down prices go. Ed Dempsey talked about this in his latest must watch video.
As I noted on Twitter (@pensionpartners), market internals have been improving. Our ATAC models used for managing our mutual fund and separate accounts are at their closest point since June to going from completely in bonds to fully in stocks with a bit more confirmation which we suspect will happen next week. We are perfectly okay with missing last week's move in stocks. We consider that missed gain the cost of insurance for our strategies, given that more money has been lost by traders trying to pick the bottom than by those trying to ride the trend. If the move is real, there will be plenty more jumps in stock prices to take advantage of.
Having said that, keep in mind that while stocks rallied in a big way last week, Treasury yields did not rise in a way commensurate with the excitement in risk assets. This may yet still happen with a delay, and it does appear that if markets are destined to make new all-time highs (the "Fall Catalyst of 2012"), then the action last week should be the catapult to make it happen. As interpreters of price, we must respect what markets are saying. Our ATAC models appear to be on the verge of telling us that the reflation trade has very suddenly returned driven not by the Fed, not by the U.S., but by price itself.
Additional disclosure: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.