Russia Throws A Monkey Wrench

Mar. 3.14 | About: SPDR S&P (SPY)

"He that waits upon fortune, is never sure of a dinner." - Benjamin Franklin

The S&P 500 (NYSEARCA:SPY) stocks closed at all-time highs as the small-cap Russell 2000 experienced a stunning streak of consecutive gains. February saw a complete and powerful V in equities after the January mini-correction, and suddenly all feels well once again. Emerging market stocks (NYSEARCA:EEM) continued to suffer from negative sentiment and outflows, as emerging market debt remains resilient. Brazil (NYSEARCA:EWZ) in particular appears poised to potentially break higher, while declines on the Shanghai index continue to prevent leadership momentum from sustainably taking hold. Yields (NYSEARCA:TLT) dropped further along the Treasury curve at the same time defensive sectors held firm into the advance, suggesting that some fear may be creeping back into markets.

While Russia (NYSEARCA:RSX) makes up a minimal weighting of most emerging market indicies, recent provocations which began towards the end of Friday could be problematic for all risk assets. Our quant models rotated out of the emerging market trade given relative momentum weakness which could reverse next week should things settle in the Ukraine. Clearly this is an evolving situation which throws a monkey wrench on the contrarian emerging market trade which we maintain has far more potential than US markets do. Google searches on the term "emerging market crisis" are nearing all time highs, and yet since the end of June most emerging market stocks are up, and emerging market debt continues to creep higher. This is a clear and undeniably irrational period, which can of course get more irrational over time. For this reason, we must respect our process by adhering to relative momentum independent of all logic that says that momentum can reverse aggressively at any moment. The weekly nature of our strategy means we could get back in should things reverse in the days ahead.

Next week can be an important one as it could either break the uptrend in overall equities and result in another corrective period like January, or a surprise move higher could occur sparked by strength in China (NYSEARCA:FXI) and Brazil. Price movement should provide important clues for sentiment and asset allocators trying to figure out where the next big move will happen. There is predictive power in several intermarket trend relationships. This will be proven in coming white papers which are now completed an in competitions. We hope to release these academically written pieces in the next month upon review by judging panels. Suffice it to say that although the post-May taper period has resulted in disconnects within the market, one can not abandon a strategy based on an unusual period, disregarding risks in buy and hold, and historical cause and effect.

Could Russia be the spark that lights a worldwide risk-off corrective period? Sure - but Greece, Cyprus, etc. were for financial markets more important and ultimately shrugged off by investors. That is not to diminish the severity of what's happening on the ground in the Ukraine, but rather meant to provide some context that for equities, this may be a non-event. Regardless; the most concerning aspect of the current environment is the behavior of Treasuries, which have laughed at the taper and rising rate environment theme. The deflation pulse is real, and if indeed emerging market stocks and bonds are right in being downbeat about the future, ask yourself if price levels for US stocks are justified in terms of an investment.

Opportunities will always emerge - the madness of the crowd simply needs to end.

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.