"If you are not willing to risk the unusual, you will have to settle for the ordinary." - Jim Rohn
The "Winter Resolution" looks to be a bullish environment after all.
For the second week in a row, market internals continue to tilt towards the return of inflation expectations, and a favorable environment for risk-taking in equities. Despite continued concerns over Europe and Friday's S&P downgrade of nine euro-zone countries, market correlations are falling, volatility is dropping, and inflation-sensitive sectors are outperforming. I must admit I am personally surprised by the speed at which internal sentiment has improved just because its a new year in terms of various asset prices, but much like a ketchup bottle, it appears as though out of nowhere ketchup (inflation expectations) has finally come out.
I am certainly sympathetic of the feeling that the crisis is not over, and that markets will continue to hemorrhage going forward. We all know how challenging an environment last year was given volatility which was more significant and violent than anything seen in recent memory, with some stats showing more price movement than occurred in the 1930s. However, not every single year will be like 2011, and we must be careful not to assume that the future will be like the most recent past, particular when the most recent past is historically an outlier.
Not much has changed since last week's letter in which I noted our ATAC models we run for our clients' managed accounts have gone full risk-on into equities. If anything, market internals and inflation momentum appears to be picking up some steam, particularly as it relates to Emerging Markets and Small-Cap stocks which our models have positioned us into as of last Friday. The fact that our models are sensing renewed interest in higher beta areas of the stock market is a positive sign, particularly because of how severe the decline was for international markets last year. It is incredibly important to note than while the S&P 500 closed 2011 flat, Emerging Markets were in most cases down in the double digits in terms of overall performance. That which was last can be first - meaning that if we are at the very start of a real uptrend now, the most beaten down stocks can rise the fastest.
Its worth observing what is also happening to markets as it relates to earnings season. In a recent CNNRadio interview (which I encourage you to listen to and which can be heard at http://www.thewallstreetshuffle.com/podcasts/20120109-Seg4.mp3), I noted that earning seasons is important not in terms of what actual earnings will be, but rather in terms of seeing if stock co-movement drops and there becomes a return to stock analysis rather than macro fear. This does appear to be happening. Also notice that despite the Europe downgrade being anticipated by investors on Friday, we did not close the day on the lows. All this is indicative of a healthy market.
The stock market may be anticipating a pickup in growth is going to occur. Whether this is because of the potential for housing to recover as homebuilder stocks seem to be signaling, or because of a delayed reaction to both the Fed and the ECB's newly printed money of late last-year, it is worth considering the very real possibility that this may actually be a very good year to put money to work again. While tempting to believe Europe will implode under its own debt weight, it does not have to do so right here, right now. Enough measures and urgency to the problem may have occurred to cause animal spirits to return to markets.
Always remember that conditions matter more than anything else, and that everything in life goes through cycles. Intermarket analysis is suggesting a return to risk-taking is here and could well persist and become more exploitable than anything we experienced last year. I encourage you to listen to the CNNRadio interview to get a deeper understanding of what our analysis suggests. I will be returning to the program on Monday, and suspect that markets could very well continue to climb an icy wall of worry in the near-term.
Michael A. Gayed, CFA
Chief Investment Strategist
Pension Partners, LLC
Summary of Writings Published Last Week:
The Lead-Lag Report: A Dramatic Shift to Risk-On - http://www.minyanville.com/businessmarkets/articles/technical-analysis-market-analysis-sector-analysis/1/9/2012/id/38757
The Strongest Reason to Believe the Bull Market is Real -
Financials Confirm the Winter Resolution is a Bull -
Winter Resolution Turns Bullish - http://www.marketwatch.com/story/winter-resolution-turns-bullish-2012-01-10
China Bull Returns - http://www.marketwatch.com/story/the-china-bull-returns-2012-01-13
Preferreds, Bullish Financials, and the Winter Resolution of 2012 - http://seekingalpha.com/article/318418-preferreds-bullish-financials-and-the-winter-resolution-of-2012
Homebuilders, Lumber, and the Winter Resolution of 2012 - http://seekingalpha.com/article/319048-homebuilders-lumber-and-the-winter-resolution-of-2012
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.