"Distrust and caution are the parents of security." Benjamin Franklin
After suffering the worst week since June, stocks closed modestly up after some volatile movements. A strong bounce off of the 50 day moving average undid much of the decline done the week before from Monday-Wednesday, after which a downside reversal occurred Thursday-Friday. As I have noted on Twitter, and as Ed Dempsey stressed in his latest ATAC Market Take video, risks remain for equities in the here and now as intermarket trend deterioration worsens. We maintain that a further decline is likely given lack of any positive confirmation within the stock market that all is well just yet.
The market has much to digest, bookended by company earnings and disappointing revenue, the looming fiscal cliff, and elections in between. Mega-cap Technology names such as Google (GOOG) and IBM saw meaningful stock price drops, as everyone's favorite momentum sector (Technology) continues to weaken. However, the bigger story remains in the deflation pulse which is beating once again given renewed strength in high dividend/low beta areas of the stock market, independent of limitless QE3 and better data on the housing front. As Ed correctly said a couple of weeks back, sometimes stocks need to "refresh the fear" before ultimately making new highs (the "Fall Catalyst of 2012").
The underlying source of this fear may be the fiscal cliff which most economists argue would cause a U.S. recession in 2013. I have stated in interviews before that I find it hard to believe that any politician, independent of who wins the Presidential election, would allow such an outcome on his or her watch. That does not mean, however, that markets can't reprice such a scenario on the small chance the fiscal cliff does happen. This alone may explain why small-cap stocks, as proxied by the Russell 2000, have been underperforming large-cap stocks unrelentingly in the last few weeks. Because small-cap stocks are less global than large-caps, they tend to be much more sensitive to domestic economic growth expectations. The fiscal cliff is a U.S. specific issue which might be getting more stressed in that part of the market as a result.
Our ATAC models used for managing our mutual fund and separate accounts remain defensive in equities as they did in the lead-up to the May "mini-correction" earlier this year which sent risk assets into a panic. Intermarket relationships do look quite similar to that juncture. Odds currently favor a decline that would ultimately not be as deep, but tradable nonetheless.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.