"Some people tap their feet, some people snap their fingers, and some people sway back and forth. I just sorta do'em all together, I guess." - Elvis Presley
Stocks closed the shortened trading week slightly positive following Hurricane Sandy and the disruption the storm caused for financial markets. On Thursday, strong economic data and consumer confidence caused the market to surge in a way that seemed to suggest an end to the corrective period was in sight following the worst October in four years for stocks. On Friday, most equity averages went roundtrip, completely undoing that advance by tumbling into the close despite a decent jobs report. As is generally the case, the market giveth, and the market taketh away.
What caused stocks to decline as much as they did Friday? Some may argue few wanted to aggressively hold onto risk assets into the elections given uncertainty over the direction of fiscal policy. The problem I have with that explanation is that it does not explain why bond prices, which fell at the open Friday, completely recouped losses, unable to break above the panic 3% yield level on 30-year Treasuries. It also does not explain the clear breakout underway in the U.S. dollar to the upside. On Bloomberg radio Friday in a segment that should be available shortly Bloomberg.com, I noted that Greek stocks fell the most during the week since May 2010 when the infamous "Flash Crash" took place in U.S. markets. While the media is staring directly at the U.S. elections, the speed under which Greek stocks fell in the periphery of our vision may be spooking the subconscious of Mr. Market.
Our ATAC models used for managing our mutual fund and separate accounts came very close to a full equity allocation following Thursday's bullish action, but the move was not confirmed enough for us to alter our allocations. We remain in the here and now out of stocks as the deflation pulse continues to beat internally within the markets as it has done following QE3. Having said that, the strength of the corrective headwinds is not as high as it was in late September based on the intermarket analysis I do. I suspect one more flush down in absolute price is needed to sync up with relative deterioration, but the next few weeks post-elections will be crucial.
The market will likely immediately focus on Europe again should the Greek stock decline be a warning of something more serious to come, and of course, on the looming fiscal cliff in the U.S. Should enough improvement within markets occur, our ATAC models should be able to capture what we still believe to be likely -- new all-time highs in the Dow Jones Industrial Average (NYSEARCA:DIA) by year-end.
Make no mistake about it -- this has been an extraordinarily challenging year, as evidenced by the huge underperformance hedge funds have been exhibiting relative to the S&P 500 (NYSEARCA:SPY). Our ATAC strategies are being tested in an extraordinary environment, and we are pleased with the results we have been able to achieve for our clients. Given the buy and rotate approach we take, we are much more comfortable taking a series of rolling short-term view points in a world of shorter cycles, continuous booms and busts, and the manic swinging of the pendulum between the extremes of inflation and deflation expectations.
Additional disclosure: 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.