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"There is a real magic in enthusiasm. It spells the difference between mediocrity and accomplishment." - Norman Vincent Peale

The S&P 500 (NYSEARCA:SPY) rose last week led by overseas optimism on the heels of solid bond auctions in Treasuries and in the huge Verizon (NYSE:VZ) bond offering, a calming of Syria concerns, and "surprisingly" stronger economic data coming from the mother of all emerging markets which is China (NYSEARCA:FXI). Since the weekend after Obama decided to seek Congressional approval for a Syrian strike, emerging markets have had a significant rip higher, seemingly out of nowhere. Some look at charts of popular emerging market ETFs and argue "that was it" and that it's better to wait for a pullback. What this misses is context. On Bloomberg last week, I continued to make the point that emerging markets (NYSEARCA:GMM) have acted like a crisis already occurred, and yet there has been no crisis like 1998 to justify the negativity this year.

The same thinking can be applied to the bond market (NYSEARCA:TLT). The yield curve is historically steep, and certainly very steep relative to inflation expectations which factually have not been trending in the right direction. Our inflation rotation models managing duration for the bulk of the year have done precisely what they are supposed to do. There is absolutely zero doubt that 2013 has played out in an abnormal way. First, it is historically extremely unusual for stocks to rally in the face of falling inflation expectations. Second, yields have spiked over the past 3 to 4 months with speed that is unprecedented, and historically dangerous. Third, emerging markets acted like an event took place. I have spoken to quite a few advisors who were very skeptical of the trade, applying traditional technical analysis. Be assured that no technical indicator could have predicted the magnitude of the move higher so far in September (a likely breakout). For one to identify momentum, momentum must first be observed. For one to identify magnitude, context must be considered.

With one extreme (generally) must come the other. Fear over the Fed tapering is almost meaningless now given just how violently markets overreacted in fixed income and in emerging market stocks. That means both have significant potential should the Fed not aggressively pull back on bond buying. I suspect that the Fed may directly and explicitly acknowledge the yield spike that has happened, and talk down duration. If the Fed does that, and yields sharply reverse on the long end, then the 1987-style risks I have been addressing can indeed fade, but without perhaps some volatility in US equities.

It is unequivocally possible that US stocks fall, US bond yields fall, and emerging market stocks rally. To think that emerging markets are a "leveraged beta play" is incorrect. If they were, they would be up 40% YTD instead of still down over 5%. For our ATAC models used for managing our mutual fund and separate accounts, we rotated out of long duration into emerging market stocks. If the trade holds, then the "fat pitch" may finally be here after a few false starts. In 2005, emerging markets largely bucked a correction in US averages at the start of the year, and then rallied nearly 50% in 7 months. Given the extent of underperformance in 2013, do not look simply at absolute price movement. The price ratio of emerging markets relative to the US has barely budged. If alpha momentum is here, further speed can be shocking.

Having said that, if beta risks end up being larger than alpha potential, we will rotate back defensively. Again, both long bonds and emerging market stocks have had historical and abnormal moves. Both have significant potential to re-adjust then for a trade. Finally, remember that we are NOT an equity only manager. We focus on absolute return and risk management. We have done precisely what we are supposed to do by being in bonds when inflation expectations fall, and when historically stocks fall with them. The obsession people have with "beating the S&P 500" more often than not results in extremely poor results because it ignores risks taken to do that. The 2013 US-centric (ex-Japan) extreme bull market has itself had many technical aberrations in the move. To assume this will continue and repeat is small-sample bias at its best and likely detrimental to longer-term performance.

Bottom line? Taper your enthusiasm about 2013 and recognize context. Many extremes have happened in the past 5 months, as asset allocation strategies failed to produce returns anywhere near to a 100% US stock market portfolio. By our calculations, year to date through the end of August, 75% of mutual funds have underperformed the S&P 500. Does that mean those funds are terrible? Absolutely not. Why? Because not every fund is a US stock fund. Making the right comparisons is crucial to understanding how to grow wealth over time, and to prevent wrong thinking and wrong decisions. To that end, the wrong decision for the Fed is to ignore the yield spike, and I suspect they will calm bonds investors down. Extreme disconnects are exploitable for those willing to think outside the box.

If I am right, investors may end up rebuilding their portfolios, BRIC by BRIC.

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.