Seeking Alpha
Mutual fund manager, CFA, registered investment advisor, macro
Profile| Send Message|
( followers)  

“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” - Arthur Schopenhauer

It's that time again folks to focus on the next “seasonal call” I'm making. We've gone from the Summer Crash I first wrote about on June 8th (early, but occurred in August/September), to the Fall Melt-Up call on September 29th (right before the immense October move up), to the whipsaw calls of the December to Remember and Fall Melt-Up resumptions. What led me to make each of these was my interpretation of intermarket trends and analysis, with a focus on listening to what the underlying message of the markets is. With Fall done and Winter here, I'm going to be making the case for something perhaps more important than direction. I believe we will see an end to the sideways volatility and a resolution to the massive disconnects that are occurring between asset classes.

What are these disconnects? Namely it has to do with the relationship of defensive sectors and the bond market to the S&P 500. I've been doing my best to brand myself as an “interpreter” of relative ratio trends, and it's clear that an incredible tension exists between the bears and bulls from an investment standpoint. In one corner are the bears, who have piled into defensive sectors such as Utilities (NYSEARCA:XLU), Healthcare (NYSEARCA:XLV), and Consumer Staples (NYSEARCA:XLP) on fear of an economic recession and bear market (which for the rest of the world it certainly has been in 2011). Oh, and let me not forget Treasury bonds, which are at yields suggestive of worldwide deflation and continued economic panic independent of the ECB's and eurozone's efforts. In the other corner? Investors in the S&P 500 (NYSEARCA:IVV) itself who as of this writing have caused a collapse in the VIX index and despite massive volatility have held large-cap stocks up, with the market essentially flat for the year.

The Winter Resolution is the idea that the answer to who is right will be determined during the Winter either by a complete collapse in the “bear trade” and lasting bull move in equities, or a massive unwind of optimism in stocks and contraction in P/E levels through declining price. Take a look below at the price ratio of the iShares Barclays 20-Year Treasury ETF (NYSEARCA:TLT) relative to the S&P 500. As a reminder, a rising price ratio means the numerator/long bond is outperforming (up more/down less) the denominator/S&P 500.


(Click to enlarge)

And below the price ratio of the Dow Jones Utilities ETF (NYSEARCA:IDU) relative to the S&P 500:


(Click to enlarge)

Notice that the length of time for each of the highlighted areas is roughly the same historically. This seems to suggest that the defensive ratios above will likely resolve themselves sooner rather than later either through a massive move up (similar to the post-Lehman period) or fall strongly, signaling that animal spirits are back and that the bull has returned. The state of uncertainty internally within the market likely will not persist for much longer. My personal view is that equities likely will fall further unless Financials begin to lead higher, which has been a tough thing to bet on given the number of false starts in the sector that investors and traders have experienced all year.

We are at an important inflection point – but the Great Relief is that the likelihood of this period ending is probably very high, and the insanity and the pace of the number of new gray hairs traders have been getting this year likely comes to a screeching halt soon.

So with that said, Happy Holidays, and from the bottom of my heart thank you for reading and tracking my work. A special thanks to SeekingAlpha for giving me the platform to present my ideas and analysis.

Disclaimer: 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 Winter Resolution Of 2012, Or The Great Relief