Seeking Alpha
Mutual fund manager, CFA, registered investment advisor, macro
Profile| Send Message|
( followers)

"The hours, minutes and seconds stand as visible reminders that your effort put them all there. Preserve until your next run, when the watch lets you see how impermanent your efforts are." - Joe Henderson

The S&P 500 (NYSEARCA:SPY) closed higher for the most part following an otherwise volatile week with many expecting a "June Swoon" to take place on continued uncertainty over the Federal Reserve and QE. A test of the 50-day moving average seemed all but certain until some strong end of day moves pushed equities higher. Payroll data showed some modest improvement, though not enough to suggest any near-term pulling back of quantitative easing from the Fed. Some argue that job gains were almost perfect in that they were modest enough to keep stimulus in place, with the unemployment rate ticking up to 7.6% as more people re-enter the labor market. To some extent this is true, since the report served as a reminder that we are still far away from the Fed's explicit unemployment rate target of 6.5%.

We live in Bizarro world, whereby anything but really good economic data is actually really good for stocks. Mediocre economic activity continues to serve as a reminder that the Fed can't really step away just yet, which in turn is supportive of equities, buy backs, and modest risk-taking by investors. While the big concern as of late has been a scenario of falling stocks and falling bonds, the exact opposite may occur in the months ahead. With mortgage applications falling sharply last week as the 30 year hovers around 4%, sentiment on the most recent breakdown in bonds could easily reverse. The dollar's severe breakdown indicates that the rally on QE tapering talk was utterly unjustified as I said on Bloomberg the week prior. This in turn means the bond sell off is probably unjustified as well. I maintain that we are likely near a soft-ceiling in rates in the short-term, which would be stock positive since it would calm fears for now of a yield spike shock.

Our ATAC models used for managing our mutual fund and separate accounts continue to favor equities over bonds in the near-term. There was a growing possibility towards the latter part of the week for a rotation, but Friday kept our inflation rotation strategies in stocks. The big question mark of course is what happens next. I suspect China (NYSEARCA:FXI) will begin to act a bit more on accelerating its own economy given weak manufacturing data, and broad equity underperformance this year. Should risk-on conditions hold, we may take a second swing at the "fat pitch" of emerging markets. QE tapering talk complicated the timing, but we very much believe a significant opportunity will manifest in overseas stocks this year. The MSCI Emerging Markets index (NYSEARCA:EEM) is underperforming the U.S. by a whopping 2300 basis point year to date. Nothing lags forever, and the further the divergence gets, the more powerful a trade can be had.

Regardless, last week served as a reminder that volatility can return to markets at any time, economic growth is still not exciting, risks continue to exist, and the consensus is usually very wrong. Our weekly strategies are designed to take advantage of asset class movement through intermarket trend analysis and metrics. The next major opportunity will either be back into bonds (risk-off) or back into emerging markets (risk-on). Either scenario can result in strong risk-adjusted performance - we just need to maintain our patience and discipline until the time is right.

Finally - I am thrilled with the feedback I have received on the re-release of my father's book on Intermarket Analysis and Investing. On Amazon.com, the book has 11 reviews, 10 of which are 5 stars. Now available on Kindle, I hope to continue honoring my father's legacy through his work, and ours here at Pension Partners.

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.

Source: Mr. Market Sends A Reminder