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Mutual fund manager, CFA, registered investment advisor, macro
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Summary

  • Defensive sectors and long duration Treasuries remain strong.
  • At this point in the cycle, yields should be rising.
  • This is not about the weather or Russia.

"To emphasize only the beautiful seems to me to be like a mathematical system that only concerns itself with positive numbers." - Paul Klee

We continue to be in one of the most confused market environments in some time. Looking at broad market averages popularly cited by the media, one might think that the "Teflon market" remains intact. Yet, there continues to be severe deterioration beneath the market's surface which large-cap indices are masking. In a recent article on SeekingAlpha, I noted that there is a crash no one seems to be talking about which is happening in small-cap indices relative to large-caps. Effectively, all of the outperformance generated by high beta small-cap averages in three weeks has erased a year's worth of leadership.

At the same time this is happening, long duration Treasuries and low beta defensive sectors, where we are allocated to in our mutual funds and separate accounts, have been steady outperformers. This is highly abnormal from a seasonality standpoint. Generally, yields fall and defensive sectors outperform outside of the "best 6 month" period of November to April. We are now going to be entering May, and those areas have already been strong. Small-cap (NYSEARCA:IWM) names and momentum trades have gotten smaller, while large-caps appear to be holding in. With emerging markets (NYSEARCA:EEM) now taking another dip lower, one must ask just how long the S&P 500 (NYSEARCA:SPY) can hold while entering a seasonally weak period, and with many other areas of the market signaling concern.

Marc Faber in the Gloom, Boom, and Doom Report will be publishing my thoughts in his May commentary. In that writing, I show that what is bothering the market has nothing to do with earlier weather excuses or geopolitical Russia (NYSEARCA:RSX) concerns. The areas of the investable landscape getting most impacted are those sensitive to the US consumer. The marketplace does not believe in the narrative over what's driving money movement. With housing (NYSEARCA:XHB) softness, mortgage originations plunging, and discretionary stocks (NYSEARCA:XLY) so weak, the message is clear - last year's yield spike is now producing economic indigestion.

This is really where context matters. We must all think about what actually is happening to market expectations here given that domestic stocks which are driven by consumers are this weak following the "wealth effect" of last year's market gains. None of this guarantees a correction/crash/bear market, but expressing concern when looking at intermarket movement is an element of prudent risk management. Until our ATAC models say otherwise, we will continue to position defensively in our absolute return and equity sector rotation strategies. There is merit to an approach which attempts to capture upside movement and obtain negative downside capture. Diversification does not mean uncorrelated. As we enter "Sell in May," there is merit to an approach which strives for uncorrelated returns.

Source: Something Concerning To Think About

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.