"I'm like a phoenix. I rise from the ashes." - Bess Myerson
Well now it's getting interesting.
For the past several weeks, I've been reminding readers that volatility is like the phoenix, and can rise from the ashes of complacency at a moment's notice. Last week bore witness to that as the VIX (NYSEARCA:VXX) spiked at the same time stocks tumbled to close July down in the final moments of the trading month. This despite GDP growing at an annualized 4% rate in the second quarter. This despite continued strong consumer sentiment. This despite robust manufacturing data.
Meanwhile, small-caps (NYSEARCA:IWM) went through a severe breakdown in what otherwise looked on the surface to not be a horrible month for US market averages. Small-caps fell 7%. The average stock remains down on the year. Home price appreciation slowed. And all the while, Treasury yields had been anticipating something very wrong with the narrative. The week prior, our absolute return and equity sector rotation mutual funds and separate accounts positioned into their respective defense modes, and were largely able to sidestep much of the breakdown as conditions suggested a harsher period was coming for equities.
China (NYSEARCA:FXI) has clearly broken out of its range, and broad based emerging market ETFs continue to show resilience. On Friday, both small-caps and large-caps in the US were down while emerging markets were strongly positive. Last year the exact opposite reaction was taking place on a near daily basis. It should not be surprising for emerging markets to diverge from US equities if we are in the midst of a correction given the action last year. We may finally be at a juncture where everything that didn't work in 2013 begins to outperform the S&P 500 in the months ahead what has up until recently been the only game in town.
For us, we will continue to tactically rotate around conditions as we always have. We are excited for the end of QE, given that it is clear with hindsight how distorted intermarket relationships became beginning May of last year. We believe that normalization is healthy, and exploitable for a buy and rotate strategy like ours which is based not on gut feeling, but on time tested relationships which tend to predict conditions which favor certain kinds of risk-taking. As I continue to tour various states presenting on our award winning papers, I look forward to a different kind of phoenix rising - one that behaves more like 2012.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has 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.