"Abused patience turns to fury." - Thomas Fuller
The S&P 500 (SPY) moved in a manic-depressive way last week, ending with minor losses following some sizeable swings up and down after the long weekend. The VIX index (VXX), often known as a "fear gauge," soared from low levels as Eurozone concerns returned. Manufacturing hemorrhaged and anxiety rose over the upcoming Italian election. Surprisingly, China (FXI) appears to be removing liquidity, and the cyclical growth trade appears to be under attack given the breakdown in commodities. Domestically in the U.S., we are nearing zero-hour on the sequester (automatic government spending cuts), with no apparent deal in sight to avoid it.
Yes - the macro environment now does appear to be confirming the intermarket deterioration Ed Dempsey and I have been addressing over the past month. We began making the case January 25th that the odds of a correction were rising, and for all intents and purposes internally within the market all signs indicate bearish behavior is expressing itself. One of the key arguments for the Nouveaux Bulls over why stocks would continue their rally in the near-term is "QEForever" given the Fed's pledge to keep stimulus going until unemployment falls to 6.5%.
The problem is that there is growing dissension within the Fed over that policy as recent Fed minutes showed. As I said on CNBC, the Fed appears to be embarking on a "confuse and conquer" strategy (). The biggest embarrassment of all for the central bank would be if stimulus causes the stock market to go vertical, but not the economy. By confusing and conquering optimistic sentiment, Bernanke and crew may be trying to temper the pace of equity gains to limit this possibility.
Two days of losses essentially erased all of February's gains for most market averages, and I maintain that a deflation pulse does appear to be beating beneath the surface. Our ATAC models used for managing our mutual fund and separate accounts remain highly defensive by positioning in bonds for a trade until intermarket deterioration ends. Corrections by their nature happen in a sharp way and are characterized by violent down moves, followed by up moves whereby money rushes in thinking that the down trend is over. The action last week is consistent with that notion.
Is a correction guaranteed? Of course not. But much like how driving in a snowstorm does not guarantee that an accident will happen, it does make the odds of one occurring more likely. Ed Dempsey discusses this with Carrie Lee in his latest market update video. Our strategies are run on a weekly basis and we are nimble enough to put the pedal to the metal if the weather clears up sooner than we anticipate. For now, though, we will not back down. This is not about opinion, and this is not about gut feel. This is about listening to price and applying a consistent process as we have done for our clients, and as I do in my writings.
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.