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Mutual fund manager, CFA, registered investment advisor, macro
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"Everyone has his day and some days last longer than others." - Winston Churchill

Stocks closed the week flat to modestly positive at the same time yields spiked as stronger than expected job growth kept bullishness alive in beta, and quickly reversed bond movement. On the Thursday prior to the jobs report, bond yields fell as Treasuries meaningfully outperformed the S&P 500 which dropped ahead of the report. Friday saw the exact opposite reaction, as various intermarket trends which favored bonds flipped. The combination of the jobs surprise, alongside a higher GDP growth figure, was enough to push our ATAC models used for managing our mutual fund and separate accounts out of long duration bonds and into large-cap equities for a short-term trade.

This is extremely important to emphasize - just because our quantitative models rotated into large-cap stocks Friday does not mean we will remain there unless our weekly models say we should. We are likely in the irrational stage of market psyche. Yields rose significantly on the idea that the jobs data would mean the Fed is going to taper soon. Meanwhile, both inflation and unemployment targets are still very far from where the Fed wants them to be. Yellen coming in means an increase in QE could take place to accelerate economic activity, allowing a holding off on taper expectations which caused "tighter financial conditions" in the summer. In other words, the bond market's reaction Friday is likely just as irrational as the yield spike that began in May, which with hindsight was clearly not justified.

We must stick to our strategy and process as an alternative investment manager designed to produce uncorrelated returns to traditional buy and hold investments. To that end, nothing in terms of prior analysis has changed. The Fed is risking a 1999 style bubble should equities continue to push forward without a real pickup in reflation. The risks to equities overall over a multi-month period remain high. Consider than small-cap stocks (IWM), mid-cap stocks (MDY), emerging markets (EEM), Europe (VGK), Japan (DXJ), and commodities (DBC) have been all underperforming US large-caps in the last two weeks. Breadth is narrowing and leadership is breaking down in the vast majority of areas of the investable landscape factually. Large-caps from a relative momentum standpoint at the only thing left standing and the only leader that remains. Being nimble is crucial here since periods of concentrated leadership tend to characterize a coming turning point.

Can stocks correct into year end? Prior to the jobs report, the odds seemed high. However, the combination of a wall of cash, better economic data relative to expectations, and favorable seasonality may keep equities elevated in the near-term, only to push out a resync in the 1st quarter of next year. 2013 has been the year of buy and hold for developed market equities. Extreme momentum went from Japan (which despite continued QE has gone no where since May), to the US, and finally to Europe. Emerging markets very likely will be next in line, and could be the story for next year given unrelenting underperformance and continued illogical behavior in terms of relative performance to the S&P 500.

Unless we are back in the 1990s, a repeat performance of stocks next year is unlikely. The presidential cycle indicates that returns may be tepid for US averages, which is precisely why it could be a stronger year for alternative strategies as mean reversion between buy and hold and buy and rotate takes place. If indeed we are in the final stages of another "melt-up" into year-end, the long-awaited correction may ultimately be more severe than most think given the breakdown in everything around large-cap equities. We stand by our approach and analysis and would not change a thing with the benefit of hindsight over how this year played out. Small-sample bias makes some believe the most recent past is indicative of the future. That assumes that the most recent past is normal.

Outliers happen in both directions.

Source: Last Bulls Standing

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.