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Mutual fund manager, CFA, registered investment advisor, macro
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"The test of success is not what you do when you are on top. Success is how high you bounce when you hit bottom." - George S. Patton

The S&P 500 (NYSEARCA:SPY) closed higher on the week as in the blink of an eye market participants completely undid the volatility and declines that scared investors. Much of this occurred immediately following the VIX (NYSEARCA:VXX) entering backwardation, and on reassurance by Yellen that she would continue along the Bernanke path. The Fed wants out of the business of QE and the market wants to reward that. Intermarket relationships continue to normalize, with historical cause and effect coming back into play. The question now is if absolute price will begin to more aggressively pay attention.

Economic data in the US has been ugly. Poor payrolls, manufacturing output, retail sales, and industrial production seem to be ignored, with the excuse being that it's the weather. This explanation is highly suspect. Weather has nothing to do with Treasuries (NYSEARCA:TLT) maturing in 30 years, and yet despite tapering, those yields have fallen. The bond market seems to not be overweighting the weather excuse as much as the stock market. In addition, the fact that retailer stocks and domestically-sensitive small-caps are underperforming does seem to suggest this is about some kind of growth slowdown pricing beyond the snow.

The culmination of market behavior last week suggests that the demand pull story is under attack. At the same time, however, a new story is beginning to emerge. With Oil (NYSEARCA:USO) remaining elevated, Copper (NYSEARCA:JJC) potentially bottoming, Gold (NYSEARCA:GLD) strong, and China (NYSEARCA:FXI) leading as of late, the market may be starting to re-price cost push inflation potential. After having been defensively positioned in long duration Treasuries during stock market volatility, our ATAC models used for managing our mutual fund and separate accounts positioned out of the bond trade and into emerging markets last week. While unclear if this sticks just yet, there was enough relative behavior to push us into the global cyclical trade.

Perhaps the fourth time is the charm for us given that we have tried the trade a few times last year only to quickly rotate out as relative momentum deteriorated. This time around, however, multiple areas are confirming. While small-caps are underperforming, emerging markets held their own in this comeback for broader equities. As I alluded to on CNBC, those who are comparing emerging markets to 1998 should really be looking at 1999 as an eventual pricing out of this supposed "crisis" takes place. If US data is going to be weaker than expected, then emerging markets are really the only other catalyst for US stocks to make new highs.

The source of all fragility is overconfidence. US bulls are overconfident in the economy and justification of stock market gains last year. Emerging markets bears are overconfident in the crisis thesis. I have said this before and I will say it again. If everyone is calling something a crisis, it either already happened, or it never will. Should be an interesting next few weeks.

Source: The Emerging Market Test

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.