"Confusion is a word we have invented for an order which is not understood." - Henry Miller
The S&P 500 (SPY) continues to make solid gains as the House announced an upcoming vote to potentially raise the debt ceiling limit for three months, removing one more fear on the fiscal side as the odds of a shutdown and default decrease. Economic data have on balance been favorable, with strong housing and jobless claims data on the U.S. front, and better than expected GDP numbers from China (FXI). The global war on the negative narrative and bear argument has resulted in a strong start to equities thus far in 2013, with the S&P 500 up over 4%. Even Japan (EWJ), which has long been an area of bearish sentiment, has rallied powerfully as fiscal and monetary stimulus gets unleashed in the world's third largest economy.
The fact that markets have rallied in such a powerful way suggests that a Fiscal Cliff deal was never really priced in prior to January 1. If it were, markets would by definition have been bid up in anticipation of the deal. We are in what I suspect is a global feeling of "confusionitis" by money managers and traders who likely have missed a large portion of the rally on fears of an economic collapse driven by the Fiscal Cliff "countdown." As Ed Dempsey and I had noted, intermarket trends never once confirmed the negativity that the media was so focused on then. Those same intermarket trends do not express that concern now either despite upcoming debt ceiling negotiations. As I said on Markets Hub of the Wall Street Journal Live, there is simply no incentive to not raise the debt ceiling, and the market I believe thinks that.
Our ATAC models used for managing our mutual fund and separate accounts remain positive on equities, with no signs of a deflation pulse just yet. ATAC is designed to rotate around inflation expectations as dictated by relative price movement, and for now at least things still look healthy. After badly underperforming in 2012, I suspect a large amount of money will be forced to chase risk assets soon enough. Nothing like higher prices to get the crowd excited.
The Winter Breakout of 2013 call I made at the very start of the year does appear to be playing out, and sooner than I initially thought as small-caps continue to make new all-time highs. While the media is harping on the decline in Apple (AAPL) shares, the reality is that Apple's decline in the face of rising market averages is likely very healthy, as Ed Dempsey explained in his latest market video update. There was a large prevailing belief that if Apple broke, the market would break as well. Recent price action proves that simply is not the case.
We remain broadly bullish on equities, and the idea that 2013 will ultimately be less about risk-on/risk-off and more about risk rotation. We are respectful of price action and are actually quite excited for the next deflation pulse. Avoiding corrections by being in bonds (TLT) can be a strong way to maintain outperformance and build on gains for the next fat pitch. Our ATAC models did that quite well in 2012 during the April-May and October stock corrections. Whenever that period comes, Ed and I will likely be sounding the alarm as our mutual fund and separate accounts prepare to rotate out of stocks.
Until then, batter up.
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.