"Hindsight is always twenty-twenty." - Billy Wilder
The start of 2014 appears to be a major disappointment. Global equities slumped and few areas of the investable landscape closed positive. In watching the first trading day of the year's price action, the behavior of emerging markets was most notable. Brazil (EWZ), Russia (RSX), India (INP), and China (FXI) all broke down heavily with unrelenting selling, continuing their severe underperformance experienced in 2013. The magnitude of the decline appeared jarring, but what was more interesting was volume in some of the most popular emerging market ETFs.
Simply put, volume spiked. The iShares MSCI Emerging Markets ETF (EEM) traded over 138 million shares on January 2nd, over 2.29x the average 3 month volume. The amount of trading also surpassed the S&P 500 ETF (SPY) on the day, something which is historically rare. Why the heavy trading on no clear catalyst, specifically on the first trading day of the year? Perhaps after seeing negative returns against the backdrop of a strong S&P 500 , money simply capitulated. The feeling of "get me out of this losing investment" may have overwhelmed advisors getting pressure from their clients, in turn causing meaningful selling to start the year.
However, it will only be known with hindsight whether this trading was justified or not given crisis pricing in many emerging market countries relative to developed markets. In 2013, emerging markets relative to the S&P 500 peaked on the first trading day of the year. Perhaps in 2014, it's the exact opposite. Take a look below at the iShares MSCI Emerging Markets ETF and note that the last time volume was this high was right around the late-June low.
(click to enlarge)Curious, no? Certainly relative momentum has been dragged down by China, but with historically low valuations and extreme negativity, could the volume spike be indicative of capitulation to start 2014? We ourselves remain ready to pull the trigger on the trade when relative momentum confirms, but it is worth considering if with hindsight we will look back on the start of the year as the moment a real change occurred. From a rebalancing standpoint, buy low sell high means reduce developed market exposure in favor of BRICs. Curiously, it appears money is doing the exact opposite.
And what about Gold's move? Perhaps the spike in Gold (GLD) prices is on bets of a return to negative real rates to help counter the deflation pulse. That could in turn be emerging market bullish if it juices inflation expectations. Either way, 2014 is certainly shaping up to be an interesting year, and one where many convergences across and within asset classes appear ripe to occur.
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.