The Nouveaux Bulls' Hubris

Includes: IVV, SPY
by: Michael A. Gayed, CFA

"Hubris is one of the great renewable resources." - P.J. O'Rourke

Stocks continued their unrelenting ascent this week, pushing the S&P 500 (NYSEARCA:SPY) (NYSEARCA:IVV) above the 1500 level for the first time since 2007. Retail money has been capitulating on the negative narrative, as beginning of year allocations to stock mutual funds have continued for the past three weeks. Washington in the near-term is out of the way, earnings have been beating expectations, and the economy finally appears to be reaching some form of escape velocity. All is well in the world, right?

Not so fast. As followers of my writings know, I began turning considerably more bullish around November 19th of last year following the October correction I called for late-September, and went so far as to say that stocks were positioned to stage another melt-up independent of the Fiscal Cliff countdown on December 3rd. The push-back I received on that was remarkable at the time, given that no intermarket trends were confirming negativity. Since that skepticism, there has been a powerful rally in stocks with the S&P 500 up over 5% so far in January. Equities have already crossed a level most analysts thought we would be at by the middle of this year.

Yet something curious is happening, which Ed Dempsey alluded to in his Bloomberg segment which can be seen here by searching his last name. Intermarket analysis here is suggesting that the odds of a decline in stocks are rising, just as the S&P 500 logs its longest winning streak since 2004. Suddenly, the world is excited about markets again. The New York Times on its front page highlighted the advance, and every single analyst and trader on CNBC and Bloomberg is saying "you have to buy stocks."

I am not sure where all these bullish people were when Ed Dempsey and I were pounding the table that stocks would rise throughout the last two months back in late-November. Clearly the momentum has been powerful, and the advance can get even more accentuated, but our ATAC models used for managing our mutual fund and separate accounts have picked up on intermarket deterioration. Our ATAC Aggressive Composite and mutual fund rotated fully out of equities Friday into bonds, while our ATAC Moderate and Conservative Composites maintain a minor allocation with a heavy overweight to fixed income.

The problem is that market internals are not reacting with the same level of bullish magnitude as absolute price is. Nouveaux Bulls have rushed into equities, extrapolating the past into the future when the time to be bullish was in January 2012 as the best year since 2009 was about to unfold. There is a certain amount of bravado occurring by those who largely missed the rally, and are now capitulating to get in. The greatest sin of all when it comes to markets is to not participate in a powerful advance, which pressures advisors to have to chase equities.

With that said, there is a set up here for a potential correction, just as large-cap equities near all-time highs as I argued in Friday's MarketWatch writing. Our inflation rotation models have dramatically shifted because the odds are rising. Could those odds very suddenly drop and the trend higher continue? Absolutely - our models are run weekly and will buy and rotate as conditions warrant. There is a certain degree of sensitivity in our approach which means that a move out of one asset class and into another may be too early. However, when it comes to markets, it is often better to be early than late, especially when a potential turning point arrives.

What about the Winter Breakout of 2013? What about the Great-Reallocation out of bonds and into stocks that makes this the "year of capital appreciation" we believe it will be? Nothing has changed - our reasons to be bullish on stocks given the potential for money to move out of fixed income and into equities remain the same. It just does not have to happen all in one month. Our models react to and respect price, potentially avoiding what could be a rocky period for stocks in the near-term ahead.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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.