"It is not who is right, but what is right, that is of importance." - Thomas Huxley
The S&P 500 (SPY) notched a minor gain on the week while the Dow broke its winning streak as residual optimism from earnings and better trade data from China kept the bulls in risk assets. Since Ed Dempsey and I began making the case that the odds of a correction are high two week ago, the S&P 500 has gained about 1%, while long-dated Treasuries have stabilized and appear ready to rally. Overseas markets have been considerably weaker than what our market averages are indicating, with Germany (EWG), Spain (EWP), Italy (EWI), China (FXI), and many other country averages falling in the past several days.
Indeed the Rocky Balboa stock market continues to hold tough, but from a risk-reward standpoint do not underestimate what is happening beneath the surface. On CNBC Friday I said on air that every Nouveau Bull needs to ask themselves why 10-year Treasuries can't definitively break above 2%, why overseas markets were so weak, why Junk debt has broken, and why defensive sectors are showing strength if the market is indeed healthy here. The wrong things are happening based on intermarket trend analysis. Does this guarantee that a correction will happen right now? Of course not - but it does mean the odds are higher than most who look at absolute price movement currently believe.
Our ATAC models used for managing our mutual fund and separate accounts remain defensive. From an inflation rotation standpoint, there is something that is bothering relative price behavior, and we must be respectful of that in the event that intermarket deterioration is signaling a risk-off juncture may be about to happen. Absolute price has little meaning, as this is entirely about relative behavior. Having said that, it does appear that next week will be a crucial one from the standpoint of whether weakness really kicks in aggressively, or a reversal occurs. Because our models are run weekly, it is entirely plausible that we could rotate fully back into stocks with enough confirmation. This would signify that the odds of a coming deflation pulse and a correction would recede, which I would make a point about in my writings.
Markets, much like Intrade, are always about probabilities that change directionally day after day. Next week I suspect will cause a definitive move in market averages and provide more clarity over the near-term environment, and as always we stand ready to accelerate time and capital for our clients. It will be very important to track the behavior of cyclical areas of the investable landscape now, given that they have largely failed to confirm optimism in broad market averages over the past two weeks.
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.