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"Judge a man by his questions rather than his answers." - Voltaire

U.S. markets made some modest gains last week while staying within a very tight trading range as money remained unclear on Fiscal Cliff negotiations, and more potential policy action by the Federal Reserve in the days ahead. The "vicious V" I referenced in my writings last week appears to be holding, and various intermarket trends remain pointing in the right direction. Friday's jobs release seems to have spooked the bond market, as better hiring caused yields to rise.

The bond market (TLT) is actually quite important to watch here. While many would argue that there is a fear bid given how low yields are, one must also consider credit spreads which are an indicator of credit market stress. While bonds across the board fell in price and rose in yield, the difference between high and low quality debt yield did not widen. A healthy environment should ideally be characterized by rising bond yields in all segments of the fixed income market, but without spread widening. Thus far, then, it appears that the bond market is internally beginning to confirm the risk-on sentiment stocks have been expressing since the middle of November.

The bigger story, however, appears to be the rotation that has been ongoing to overseas markets. I have seen many argue that the reason markets rallied following the June 4th low (the start of my "melt-up" call following the mini-correction of April/May) was because of QE3 hope and Federal Reserve actions. The problem with this narrative is that price disagrees. Since the very end of May, it has been international developed markets (EFA) which have outperformed the U.S. Germany, as one example, is up over 27% year to date, with quite a bit of that move occurring in the second half of the year. European Financials since the end of July have rallied north of 40% on average.

The rotation now appears to be shifting to emerging markets. China (FXI) and Brazil (EWZ) most notably appear to be improving at the fastest pace, as expectations for higher growth in 2013 cause money to be comfortable taking risk in more export driven economies. Brazil in particular may see quite a bit of movement next year given lagged reactions to aggressive fiscal and monetary policy shifts used to counter slowing growth. Part of the "Fall Catalyst" call was that U.S. markets would get led higher by emerging markets after having lagged for the bulk of the year. That appears to now be underway.

Our ATAC models used for managing our mutual fund and separate accounts remain positioned in equities, and have allocated to emerging markets given confirmation over the past several days of leadership characteristics. Note that because our models are short-term oriented, any changes to market conditions means we could very easily and quickly rotate out of all stocks and into bonds. However, such a move seems unlikely in the very near-term in the face of positive seasonality, overall negativity on the Fiscal Cliff, and the complete disbelief that the S&P 500 (IVV) is on track for its third best year in a decade.

The question now is simple: Can a sudden surge into the end of the year happen?

My response is simple: Never underestimate the power of the markets to leave most behind.

Source: End Of Year Surge Still Possible?

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.