"There was definitely a period when I just felt out of sync with earth." - Judd Apatow
The S&P 500 (SPY) fell last week with some severe weakness occurring in key parts of the investable landscape. The mood seems to have suddenly turned quite negative on risk assets, with commodities, and most notably gold, undergoing sharp declines. Much of the talk was focused on gold (GLD) which collapsed between Friday to Monday in a way not seen for several decades. However, U.S. stocks themselves broke down, with major technical weakness in small-cap averages (IWM) which are now trading below their own 50 day moving averages. Treasury Inflation Protected Securities (TIP) had a nasty decline as demand for inflation protection fell.
The deflation pulse Ed Dempsey and I have been pounding the table on since the end of January is now self-evident. In prior writings, I referenced our next seasonal call as the "Spring Sync" - the idea that at some point, the message of intermarket trends must converge to absolute price movement in U.S. averages. With cyclical emerging market stocks in a clear correction since the start of the year, industrial sectors lagging, defensive sectors leading, the dollar strong, small caps underperforming, Treasury yields falling, and credit spreads potentially on the verge of widening, the risk-off environment to most seems to have come out of nowhere. For us, intermarket analysis has been warning of this ahead of time.
Our ATAC models used for managing our mutual fund and separate accounts continue to favor bonds, profiting off of momentum in the deflation trade. How long such an environment persists is unclear. Because our strategies are run weekly, we will adjust as conditions themselves dynamically alter. However, it is worth noting that this may be a very tricky juncture. Nouveaux Bulls will argue that the cyclical trade is oversold, which I actually do not disagree with. Gray Haired Bears, however, will argue that we just saw the mother of all triple tops in U.S. averages. Both could be right, and neither could be right. The disconnects are so blatant now that quite literally anything can happen, given that the trend higher was by many metrics an outlier to begin with.
This does put into question the effectiveness of $85 billion/month coming from the Fed. In a world where the multiplier effect is broken and velocity is not picking up, the Fed's money printing can be countered with a mere 1% decline in U.S. equity market cap (total north of $18 trillion). Markets can create and destroy faster than the printing press given their sheer size. With demand pull inflation non-existent due to lackluster jobs growth, and cost push inflation not a concern given the weakness in commodities, it is becoming increasingly clear that the market which priced in reflation last year is now starting to say "show me" when it comes to the economy.
For now, we remain cautious. Our analysis was never about opinion, and was always about interpreting internal behavior. No one can impose his or her will on markets, so instead we choose to listen to price. The interactions across and within asset classes must be respected. I sincerely hope that with the coming re-release of my father's 1990 book on Intermarket Analysis and Investing, followers of our work will be able to get a deeper understanding of the genesis around ATAC. I am aiming for an early May release after over a year in the making.
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.