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

"Comeback is a good word, man." - Mickey Rourke

The S&P 500 (NYSEARCA:SPY) closed red on the week following 8 weeks of unrelenting gains despite falling jobless claims, and better PMI data coming out of Europe as euphoria-driven multiple expansion momentum appears to be waning. Fed officials continued their "confuse and conquer" strategy with some still stressing that tapering of QE would be appropriate for September. The bond market (NYSEARCA:TLT) seems to have already priced in a pulling back of bond buying, while the US stock market seems to only now be realizing that its a possibility despite Bernanke's dovish talk that caused the surge in domestic beta following late June. The taper turbulence that Ed Dempsey and Carrie Lee discussed in our most recent market update video is underway.

From an intermarket trend standpoint, there are a number of important, subtle changes taking place. Inflation expectations (NYSEARCA:TIP) are indeed starting to show some meaningful acceleration. The Materials (NYSEARCA:XLB) sector, which has been a poor performer all year, has gotten a very strong bid relative to the S&P 500 in recent days. Copper (NYSEARCA:JJC) is showing signs of life. Brazil (NYSEARCA:EWZ) in 2 days eliminated 2 weeks worth of losses. A global reflation resync may finally be getting underway, as I said on air Friday. I believe this is wildly important to pay attention to. Developed economies have dramatically outperformed the suppliers of developed economies. This is illogical. If you believe the buyers are improving, then emerging markets must participate at some point because of how important the US and Europe are for their own exports.

While emerging markets (NYSEARCA:GMM) were poor performers Monday through Wednesday, a significant reversal seems to now be underway. On Thursday, emerging markets performed considerably better than the S&P 500. More importantly, however, emerging markets were also up nicely Friday while the US stock market actually closed in the red. As a matter of fact, emerging markets intraday almost looked like an inverse S&P 500 ETF, gaining strength on the upside as the US was weakening further.

Emerging markets have priced in an event that has not actually occurred, and the spread against the US suggests big trades are coming. If the reflation re sync is about to take place, action similar to Friday should continue, whereby US stocks fall and, ironically, emerging market equities serve as a sort of "safe-haven" trade. To assume that it is impossible for Brazil, Russia, India, and China to rally in the face of falling US stocks is simply wrong. In 2005, emerging markets rallied on an absolute basis as US averages underwent a corrective period. For emerging markets to simply return back to the May ratio level against the S&P 500, they need to generate alpha north of 16%. Simply put, that is immense, and extremely doable. When emerging market stocks move, they tend to move much faster than anyone thinks is possible.

It is important for strength to persist, and for reflation expectations to continue to turn up. Should our inflation rotation models sense a change in underlying tone, there is a chance we rotate into bonds. It is for this reason that next week is pivotal. Historically, emerging markets have had many 5%+ weekly up moves. As algorithms begin noticing an end to US momentum and a start to emerging market strength, it will likely become a self-fulfilling momentum trade that very few will see coming.

There are times when positive alpha overwhelms negative equity beta. Batter up.

Source: Time For Emerging Markets To Emerge

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.