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Summary

  • Defensive sectors well-bid.
  • Small-cap high beta areas wrecked.
  • Emerging markets may be starting melt-up.

"Wisdom begins in wonder." - Socrates

Market action the last several trading days has been, for lack of a better term, funky and abnormal relative to recent history. Large-cap stocks (NYSEARCA:SPY) closed the week marginally lower, but momentum stocks and US small-caps (NYSEARCA:IWM) got utterly wrecked. A severe unwind appears to be underway in high-beta areas like Biotech (NASDAQ:IBB) and Social Media (NASDAQ:SOCL). Defensive sectors continue to be well-bid. Long-duration Treasuries (NYSEARCA:TENZ) remain strong, despite Fed talk about rising rates to come and an end to Quantitative Easing. If you looked purely at US intermarket movement, behaviorally many things are beginning to look like a correction is either underway, or about to begin.

Interestingly enough, though, a complete and utter rip higher in emerging markets took place, diverging entirely from US equities. The iShares Emerging Market ETF (NYSEARCA:EEM) went up 4 days in a row, while iShares Russell 2000 ETF went down 4 days in a row at the same time. This has never happened before in history. Brazil (NYSEARCA:EWZ) melted up as money began betting on political change in upcoming elections, India (NYSEARCA:EPI) continues to push for higher highs, and China (NYSEARCA:FXI) gapped up on talk of coming stimulus. The movement in emerging markets suggests a severe change in tone has now occurred. With the US looking vulnerable, emerging markets are looking stronger than ever as debt and currencies completely mock the crisis narrative.

If the move in emerging markets is real, there is likely much more to go, and last week will likely look like a blip in terms of outperformance. The primary issue, however, remains strength in those sectors of the market which tend to be leading indicators of corrections and/or higher volatility ahead. This is not a statement based on gut feeling. On the contrary - the 2014 Dow Award winning paper "An Intermarket Approach to Beta Rotation", which Charlie Bilello and I wrote, proves the history behind one of these sectors (Utilities). That paper will be available to download tomorrow on the Market Technicians Association website, our own pensionpartners.com website, and on the Social Science Research Network. The paper will provide strong insights into the building blocks of our ATAC models.

I have teased out for some weeks now major news to come. Winning the 2014 Dow Award is the first of three exciting announcements over the next several week. Coming into the second quarter, conditions do seem to suggest a sideways market is likely, particularly if emerging markets finally begin the "Great Convergence of 2014" relative to US markets. If, however, another turn lower begins, then the bond market has it right and US stocks could correct in a deep way to adjust to very real deflationary pressures which the Fed has been unable to fully break.

Charlie Bilello and I will be honored by the Market Technicians Association this Thursday for our paper. If you happen to be in NYC and are interested in meeting us as well as many other big players in the field of technical analysis, you can attend the Gala by purchasing a ticket at here.

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.

Source: The Great Convergence Between Emerging Markets And The U.S. Begins?